We document that the aggregate price level responds flexibly and asymmetrically to large positive and negative value-added tax changes. We present a price-setting model with menu costs, trend inflation, and fat-tailed product-level shocks that is consistent with these observations. The model predicts a flexible price-level response to standard monetary policy shocks because it anticipates a large number of firms on the verge of price adjustment and far from their optimal prices when the shock hits.
Karadi, Peter, and Adam Reiff.
"Menu Costs, Aggregate Fluctuations, and Large Shocks."
American Economic Journal: Macroeconomics,
Price Level; Inflation; Deflation
Business Fluctuations; Cycles
Business Taxes and Subsidies including sales and value-added (VAT)