Countercyclical Taxation and Price Dispersion

Eric Mayer, Oliver R. Grimm
2008 Social Science Research Network  
In this paper, we explore the benefits from a supply-side oriented fiscal tax policy within the framework of a New Keynesian DSGE model. We show that countercyclical tax rules, which are contingent on the observed welfare gap or on the cost-push shock and levied on value added, remarkably reduce the adverse impact of cost-push shocks on welfare. We state that the tax rule establishes a path for the evolution of marginal cost at the firm level that largely prevents built up of price dispersion.
more » ... e highlight that this tax policy is also effective under a balancedbudget regime. Hence, fiscal policy can disencumber monetary policy in the light of cost-push shocks. JEL-classification: E32, E61, E62
doi:10.2139/ssrn.1151171 fatcat:2woedruzmjhuznlz33zbrlnvhe