The article examines how a central bank should respond when a value added tax rate is increased. They use a model to compare the effects of a simple interest rate rule versus an optimal policy. With real wage rigidity, the optimal policy leads to lower inflation over a shorter period, followed by a slight deflation. This is because the policy includes a commitment to target a certain price level, which helps control inflation expectations. The central bank does not fully revert the price level to its original level after the tax increase.