A NOTE ON PROGRESSIVE TAXATION, NOMINAL-WAGE RIGIDITY, AND BUSINESS CYCLE DESTABILIZATION

Macroeconomic Dynamics ◽

10.1017/s1365100519000579 ◽

2019 ◽

pp. 1-14

Author(s):

Miroslav Gabrovski ◽

Jang-Ting Guo

Keyword(s):

Business Cycle ◽

New Keynesian ◽

Wage Rigidity ◽

Nominal Wage ◽

Progressive Taxation ◽

Equilibrium Degree ◽

Tax Progressivity ◽

Cyclical Fluctuations ◽

Keynesian Model ◽

Nominal Wage Rigidity

In the context of a prototypical New Keynesian model, this paper examines the theoretical interrelations between two tractable formulations of progressive taxation on labor income versus (i) the equilibrium degree of nominal-wage rigidity as well as (ii) the resulting volatilities of hours worked and output in response to a monetary shock. In sharp contrast to the traditional stabilization view, we analytically show that linearly progressive taxation always operates like an automatic destabilizer which leads to higher cyclical fluctuations within the macroeconomy. We also obtain the same business cycle destabilization result under continuously progressive taxation if the initial degree of tax progressivity is sufficiently low.

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The Negative Mean Output Gap

IMF Working Papers ◽

10.5089/9781513511740.001 ◽

2019 ◽

Vol 19 (183) ◽

Author(s):

Shekhar Aiyar ◽

Simon Voigts

Keyword(s):

Adjustment Costs ◽

New Keynesian ◽

Wage Rigidity ◽

Estimation Methods ◽

Output Gap ◽

Nominal Wage ◽

Systematic Bias ◽

Keynesian Model ◽

Wage Adjustment ◽

Nominal Wage Rigidity

We argue that in an economy with downward nominal wage rigidity, the output gap is negative on average. Because it is more difficult to cut wages than to increase them, firms reduce employment more during downturns than they increase employment during expansions. This is demonstrated in a simple New Keynesian model with asymmetric wage adjustment costs. Using the model's output gap as a benchmark, we further show that common output gap estimation methods exhibit a systematic bias because they assume a zero mean. The bias is especially large in deep recessions when potential output tends to be most severely underestimated.

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Downward Nominal Rigidity in West German Earnings, 1975-95

German Economic Review ◽

10.1111/1468-0475.00046 ◽

2001 ◽

Vol 2 (4) ◽

pp. 385-417 ◽

Cited By ~ 20

Author(s):

Thomas Beissinger ◽

Christoph Knoppik

Keyword(s):

Business Cycle ◽

Analytical Framework ◽

Wage Rigidity ◽

Nominal Wage ◽

Symmetry Approach ◽

Nominal Rigidity ◽

Inflation Targets ◽

Nominal Wage Rigidity ◽

Time Invariant

Abstract If downward nominal wage rigidity exists, it should affect the distribution of earnings changes. We present a common analytical framework for three distinct and previously unconnected approaches to the analysis of downward nominal rigidity, the skewness±location approach, the symmetry approach and the histogram±location approach. We modify them by dropping the assumption of time-invariant rigidity and apply them to earnings data from the IABB-escha Èftigtenstichprobe (IABS). We find that the distribution of West German log earnings changes is indeed affected by downward nominal rigidity. Our modification of the approaches also allows us to find that the degree of nominal rigidity depends on business cycle conditions, with weaker rigidity in times of rising unemployment. Our findings support the critics of very low inflation targets.

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