Progressive taxation as an automatic stabilizer under nominal wage rigidity and preference shocks

Abstract Previous research has shown that in the context of a prototypical New Keynesian model, more progressive income taxation may lead to higher volatility hours worked and total output response monetary disturbance. We analytically show this business‐cycle destabilization result is overturned within an otherwise identical macroeconomy subject impulses household's utility formulation. Under continuously or linearly fiscal policy rule with symmetric‐equilibrium tax burden unchanged, increase positive level progressivity will always raise degree equilibrium nominal‐wage rigidity, thus serve as automatic stabilizer mitigates cyclical fluctuations driven by preference shocks.