Distorted Prices and Targeted Taxes in the New Keynesian Network Model

Anastasiia Antonova and Gernot Müller

No 12144, CESifo Working Paper Series from CESifo

Abstract: When confronted with sectoral shocks, policymakers often resort to targeted, sector-specific taxes in an \emph{ad hoc} fashion. Based on the New Keynesian Network model, we characterize the optimal tax response to sectoral shocks: it features twice as many tax instruments as there are sectors, is budget-neutral, and not confined to the sector where the shock originates. We show that the optimal policy can be approximated by a simple rule that responds to inflation in the shocked sector and adjusts tax instruments in other sectors according to input-output linkages. We study its quantitative performance in a calibrated version of the model.

Keywords: sectoral shocks; sales taxes; production subsides (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12144

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