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Fiscal Consolidations and Informality in Latin America and the Caribbean

Thibault Lemaire ()

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Abstract: The transmission mechanisms of fiscal policy are significantly affected by informality in the labour market. Extending a narrative database of fiscal consolidations in 14 countries from Latin America and the Caribbean between 1989 and 2016 in order to account for heterogeneity in terms of commitment to the reforms, I show that tax-based and spending-based multipliers are both recessionary and do not significantly differ one from another in this region. Furthermore, these multipliers decline in absolute value as the level of labour informality increases in the economy, although evidences are less robust for spending-based consolidations. An analysis of the effects of tax-based consolidations on private demand suggests that labour market informality constitutes a short-term social buffer that attenuates the contractionary effects of this type of policy by increasing investment opportunities through tax evasion and entrepreneurial alternatives to unemployment for dismissed workers.

Keywords: Fiscal consolidation; taxation; informality; emerging market economies (search for similar items in EconPapers)
Date: 2020-01
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-02492309
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Published in 2020

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Working Paper: Fiscal Consolidations and Informality in Latin America and the Caribbean (2020) Downloads
Working Paper: Fiscal Consolidations and Informality in Latin America and the Caribbean (2020) Downloads
Working Paper: Fiscal Consolidations and Informality in Latin America and the Caribbean (2020) Downloads
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