Taxation and Aggregate Price Stickiness
1 : Fannie Mae
Washington, DC 20016 -
United States
We study the impact of taxation on aggregate price stickiness in New Keynesian economics. We show that taxation increases aggregate price stickiness. Moreover, we show that the magnitude of the impact is first-order. Our results imply that taxes act as automatic destabilizers on the supply side, which is in sharp contrast with the traditional role of automatic stabilizers played by taxes on the demand side.