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The Role of Taxes as Automatic Destabilizers in New Keynesian Economics

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  • Claus Thustrup Hansen
  • Henrik Jacobsen Kleven

Abstract

This paper analyses the effects of taxation in New Keynesian economics. The results show that taxes contribute to price and wage stickiness and, moreover, that the resulting fluctuations in welfare are magnified by the presence of taxes. These results are at odds with the old Keynesian idea of automatic stabilizers.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2000/wp-cesifo-2000-12/cesifo_wp399.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 399.

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Date of creation: 2000
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Handle: RePEc:ces:ceswps:_399

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Keywords: New Keynesian economics; taxation; automatic stabilizersJEL Classification: E32; E62;

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References

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  1. Laurence Ball & David Romer, 1987. "Sticky Prices as Coordination Failure," NBER Working Papers 2327, National Bureau of Economic Research, Inc.
  2. Levy, Daniel, et al, 1997. "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 791-825, August.
  3. Agell, J. & Dillen, M., 1991. "Macroeconomic Externalities: are Pigovian Taxes the Answer?," Papers 487, Stockholm - International Economic Studies.
  4. Shantanu Dutta & Mark Bergen & Daniel Levy & Robert Venable, 2005. "Menu Costs, Posted Prices, and Multiproduct Retailers," Macroeconomics 0505007, EconWPA.
  5. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
  6. Ball, Laurence & Romer, David, 1990. "Real Rigidities and the Non-neutrality of Money," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 183-203, April.
  7. James M. Poterba & Julio J. Rotemberg & Lawrence H. Summers, 1985. "A Tax-Based Test for Nominal Rigidities," Working papers 376, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. David Romer, 1993. "The New Keynesian Synthesis," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 5-22, Winter.
  9. Alan J. Auerbach & Daniel R. Feenberg, 2000. "The Significance of Federal Taxes as Automatic Stabilizers," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 37-56, Summer.
  10. Laurence M. Ball & David Romer, 1987. "Are Prices Too Sticky?," NBER Working Papers 2171, National Bureau of Economic Research, Inc.
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Cited by:
  1. Kenneth Kletzer, 2006. "Taxes and stabilization in contemporary macroeconomic models," International Tax and Public Finance, Springer, vol. 13(4), pages 351-371, August.
  2. Hiebert, Paul & Pérez, Javier J. & Rostagno, Massimo, 2009. "The trade-off between public debt reduction and automatic stabilisation," Economic Modelling, Elsevier, vol. 26(2), pages 464-472, March.
  3. Erkki Koskela & Matti Virén, 2004. "Government Size and Output Volatility: New International Evidence," Discussion Papers 339, Government Institute for Economic Research Finland (VATT).
  4. Kotilainen, Markku, . "Economic Shocks, Progressiveness of Taxation, and Indexation of Taxes and Public Expenditure in EMU," Discussion Papers 1011, The Research Institute of the Finnish Economy.
  5. Koskela, Erkki & Viren, Matti, 2003. "Government Size and Output Volatility: New International Evidence," Discussion Papers 857, The Research Institute of the Finnish Economy.

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