Fiscal multipliers and informality in sub-Saharan Africa

Eric Amoo Bondzie (), William Godfred Cantah, Ferdinand Ahiakpor and William Gabriel Brafu-Insaidoo
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Eric Amoo Bondzie: University of Cape Coast
William Godfred Cantah: University of Cape Coast
Ferdinand Ahiakpor: University of Cape Coast
William Gabriel Brafu-Insaidoo: University of Cape Coast

International Economics and Economic Policy, 2026, vol. 23, issue 1, No 7, 34 pages

Abstract: Abstract This study examines the impact of a sizable informal sector on fiscal multipliers in a macroeconomic model. The study uses panel data from 26 sub-Saharan African countries between 1991 and 2021 and employs both theoretical DSGE modelling, the system GMM, and fixed-effect threshold analysis. We contribute to the literature by evaluating novel interactions between the informal sector and fiscal policies. The results indicate that tax hikes cause substantial tax evasion, thereby negatively affecting official sector outputs and improving informal sector activities. However, government spending shocks increase the official sector’s GDP proportionately. All in all, the fiscal multipliers obtained from the tax hikes seem to be smaller than those obtained from the government spending shock. The empirical estimates complemented and reinforced the results obtained from the theoretical model. The empirics indicated that a percentage increase in government expenses leads to an increase in economic growth of 0.29 and 0.031%, respectively, for both the fixed effects and the system GMM models. However, when we control the level of informality in the economy, the estimates reduce to 0.27 and 0.29%, respectively. Hence, the magnitude of an expansionary fiscal policy on economic growth with a large informal sector is reduced. The threshold regression results showed that expansionary fiscal policy is more effective when informality is below the threshold value of 41.5% of GDP. We recommend the incorporation of informality in macroeconomic modelling and policy formulations for policy effectiveness.

Keywords: Informality; Fiscal multipliers; DSGE models; Threshold analysis; Sub-Sahara africa; S: D58; E12; E26; E52; E62 (search for similar items in EconPapers)
Date: 2026
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DOI: 10.1007/s10368-025-00702-7

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