Fiscal Multipliers and Informality
Emilio Colombo,
Davide Furceri,
Pietro Pizzuto and
Patrizio Tirelli
No 2022/082, IMF Working Papers from International Monetary Fund
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 of 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.
Keywords: Fiscal multiplier; local projection methods; informality; DSGE model; TANK model.; high-informality country; role of informality; unofficial multiplier; government spending shock; investment goods producer; shadow economy variable; depreciation rate; Fiscal multipliers; Informal economy; Consumption; Global (search for similar items in EconPapers)
Pages: 73
Date: 2022-05-06
New Economics Papers: this item is included in nep-dge, nep-iue, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)
Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=517622 (application/pdf)
Related works:
Working Paper: Fiscal Multipliers and Informality (2022) 
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:imf:imfwpa:2022/082
Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm
Access Statistics for this paper
More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().