This paper investigates a real business cycle model with endogenous capital
income and labour income taxes under the incomplete competitive markets.
Our model is able to duplicate the feature of the stylized facts of business
cycles in Korea. Under the incomplete competitive markets, a positive
productivity shock increases income and then expands government expenditure
more than consumption, and then requires the increases of government bond
supply. However, the tax rates of both labour and capital incomes decrease
temporarily because the supplies of government bonds have more flexibility
than tax rates to finance the government expenditure.