Countercyclical Taxation and Price Dispersion

CER-ETH - Center of Economic Research at ETH Zurich, Working Paper No. 88

33 Pages Posted: 25 Jun 2008

See all articles by Eric Mayer

Eric Mayer

University of Würzburg - Institute of Economics and Social Sciences

Oliver R. Grimm

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Date Written: June 2008

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 alternatively on the markup shock and levied on value added, reduce remarkably the inverse impact of cost push shocks. 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 balanced budget regime. Hence, fiscal policy can disencumber monetary policy in the light of cost push shocks.

Keywords: Countercyclical fiscal policy, welfare costs, nominal rigidities

JEL Classification: E32, E61, E62

Suggested Citation

Mayer, Eric and Grimm, Oliver R., Countercyclical Taxation and Price Dispersion (June 2008). CER-ETH - Center of Economic Research at ETH Zurich, Working Paper No. 88, Available at SSRN: https://ssrn.com/abstract=1151171 or http://dx.doi.org/10.2139/ssrn.1151171

Eric Mayer (Contact Author)

University of Würzburg - Institute of Economics and Social Sciences ( email )

Sanderring 2
Wuerzburg, 97070
Germany

Oliver R. Grimm

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

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