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Informality and macroeconomic volatility: do credit constraints matter?

Author

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  • Catalina Granda Carvajal

Abstract

Purpose - – The purpose of this paper is to study the implications of borrowing constraints characterizing the informal sector for macroeconomic volatility. Design/methodology/approach - – To this end, the author develops a simple dynamic stochastic general equilibrium model wherein registered activity not only is the basis to determine tax liabilities, but also serves as collateral for securing debts. Such a framework allows for computational experiments to analyze the effect of informality on aggregate fluctuations. Findings - – The experiments show that the credit-constrained informal sector does exert a significant influence on the cyclical volatility of consumption and investment. Originality/value - – There are not many studies addressing the implications of informal economic activities for macroeconomic fluctuations. This paper contributes to the literature by developing a theoretical model showing that credit constraints characterizing these activities might play a non-negligible role in explaining the cyclical volatility of some important aggregates.

Suggested Citation

  • Catalina Granda Carvajal, 2015. "Informality and macroeconomic volatility: do credit constraints matter?," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 42(6), pages 1095-1111, November.
    • Handle: RePEc:eme:jespps:v:42:y:2015:i:6:p:1095-1111
    DOI: 10.1108/JES-03-2014-0043
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    References listed on IDEAS

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    Cited by:

    1. Oksana Omelchenko & Oleksandr Dorokhov & Oleg Kolodiziev & Liudmyla Dorokhova, 2018. "Fuzzy Modeling of the Creditworthiness Assessments of Bank’s Potential Borrowers in Ukraine," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 4, pages 100-125.
    2. Bruno Chiarini & Maria Ferrara & Elisabetta Marzano, 2020. "Tax Evasion, Investment Shocks, and the Consumption Puzzle: A DSGE Analysis with Financial Frictions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(4), pages 907-932, June.
    3. Colin C. Williams & Ioana Alexandra Horodnic & Jan Windebank, 2017. "Evaluating the internal dualism of the informal sector: evidence from the European Union," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 44(4), pages 605-616, September.
    4. Tobón Orozco, David & Molina, Carlos & Vargas, Harvey, 2018. "Can environmental taxes and payments for ecosystem services regulate pollution when the resilience of water bodies is surpassed?," Borradores Departamento de Economía 17179, Universidad de Antioquia, CIE.
    5. Chiarini, Bruno & Ferrara, Maria & Marzano, Elisabetta, 2022. "Tax evasion and financial accelerator: A corporate sector analysis for the US business cycle," Economic Modelling, Elsevier, vol. 108(C).
    6. García-Suaza, A & Gómez, M & Jaramillo, F, 2021. "Fiscal policy and informality in Colombia," Documentos de trabajo - Alianza EFI 19416, Alianza EFI.

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    More about this item

    Keywords

    Tax evasion; Informal economy; Credit constraints; Macroeconomic volatility;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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