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 ‡uctuations within the macroeconomy. We also obtain the same business cycle destabilization result under continuously progressive taxation if the initial degree of tax progressivity is su¢ cient low.
This paper develops a model of the housing market with search and credit frictions.The interaction between the two frictions gives rise to a novel channel through which the financial sector affects prices and liquidity in the housing market. Furthermore, an interesting feature of the model is that both frictions combined lead to multiple equilibria. A numerical exercise suggests that credit shocks have a relatively larger impact on mortgage debt and liquidity than on prices.
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