Networks, Sectoral Shocks, and Targeted Taxes

with Anastasiia Antonova

Sectoral shocks cause aggregate fluctuations as they transmit through production networks, distorting relative prices within and across sectors if prices are sticky. Monetary policy is then unable to implement the efficient allocation. Against this background, we study the optimal tax response to sectoral shocks in a New-Keynesian network model. It features twice as many tax instruments as there are sectors, is budget-neutral, and not confined to the sector where the shock originates. We find a simple tax rule can approximate the optimal policy arbitrarily well and illustrate the quantitative relevance of our results for a calibrated version of the model.