The Dynamics of Informality and Fiscal Policy under Sovereign Risk

Francesco Pappadà and Yanos Zylberberg

Bristol Economics Discussion Papers from School of Economics, University of Bristol, UK

Abstract: This paper examines how the dynamics of informality affects optimal fiscal policy and default risk. We build a model of sovereign debt with limited commitment and informality to assess the consequences of dynamic distortions induced by fiscal policy. In the model, fiscal policy has a persistent impact on taxable activity, which affects future fiscal revenues and thus default risk. The interaction of tax distortions and limited commitment strongly constrains the dynamics of optimal fiscal policy and leads to (i) more frequent default episodes and (ii) costly fluctuations in consumption.

Date: 2025-04-02
New Economics Papers: this item is included in nep-dge and nep-iue
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.bristol.ac.uk/efm/media/workingpapers/w ... pdffiles/dp25795.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bri:uobdis:25/795

Access Statistics for this paper

More papers in Bristol Economics Discussion Papers from School of Economics, University of Bristol, UK
Bibliographic data for series maintained by Vicky Jackson ().