Countercyclical taxation and price dispersion

Eric Mayer and Oliver Grimm

No 78, W.E.P. - Würzburg Economic Papers from University of Würzburg, Department of Economics

Abstract: 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. We 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.

Keywords: Countercyclical fiscal policy; welfare costs; nominal rigidities (search for similar items in EconPapers)
JEL-codes: E32 E61 E62 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Countercyclical Taxation and Price Dispersion (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:wuewep:78

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