Profit Taxation and Aggregate Price Stickiness

This paper studies the impact of profit taxation on aggregate price stickiness in New Keynesian economics by introducing profit taxation into An (2009). We show that the impact is theoretically ambiguous. Our result has three key implications. First, it disagrees with the recent conclusion drawn by Kleven and Kreiner (2003) that \taxation of profits increases the degree of price rigidity" (p.1128). Second, it is also at odds with the traditional Keynesian idea that taxes act as automatic stabilizers. Finally, it suggests that fiscal and monetary policies can coordinate their impact on aggregate price stickiness to stabilize the economy.