Fiscal Multipliers and Informality

Emilio Colombo, Davide Furceri, Pietro Pizzuto and Patrizio Tirelli

No dis2201, DISEIS - Quaderni del Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo from Università Cattolica del Sacro Cuore, Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo (DISEIS)

Abstract: This paper investigates the role of informality in affecting the magnitude of the fiscal multiplier in a panel of 141 countries, using the local projections method. We find a strong negative relationship between the degree of informality and the size of the fiscal multiplier. This result holds irrespective of the levels of economic development and institutional quality and is robust to additional country characteristics such as trade, financial openness and exchange rate regime. In a two-sector new-Keynesian model, we rationalize this result by showing that fiscal shocks raise the relative price of official goods, shifting demand towards the informal sector. This reallocation effect increases with the level informality, because a larger informal sector is associated with a stronger appreciation of relative prices in response to fiscal shocks. Thus, informality raises the size of the unofficial multiplier. A higher degree of non-separability between public and private goods also contributes to rationalize the lower multipliers in high-informality countries.

JEL-codes: C32 E26 H30 H50 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-dge, nep-iue and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Working Paper: Fiscal Multipliers and Informality (2022)
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