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Sovereign default and imperfect tax enforcement

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  • Francesco Pappadà

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, Banque de France - Banque de France - Banque de France)

  • Yanos Zylberberg

    (University of Bristol [Bristol], CEPR - Center for Economic Policy Research - CEPR)

Abstract

The effect of fiscal policy on default risk is mitigated by the response of tax compliance. To explore the consequences of this stylized fact, we build a model of sovereign debt with limited commitment and imperfect tax enforcement. Fiscal policy persistently affects the size of the informal economy, which impacts future fiscal revenues and default risk. The interaction of imperfect tax enforcement and limited commitment strongly constrains the dynamics of optimal fiscal policy and leads to costly uctuations in consumption.

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  • Francesco Pappadà & Yanos Zylberberg, 2021. "Sovereign default and imperfect tax enforcement," Working Papers halshs-03142208, HAL.
    • Handle: RePEc:hal:wpaper:halshs-03142208
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03142208
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    1. Sovereign default and imperfect tax enforcement
      by Christian Zimmermann in NEP-DGE blog on 2021-03-08 15:27:23

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    2. Prein, Timm, 2019. "Persistent Unemployment, Sovereign Debt Crises, and the Impact of Haircuts," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203654, Verein für Socialpolitik / German Economic Association, revised 2019.

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    More about this item

    Keywords

    Sovereign default; Imperfect tax enforcement; Fiscal policy;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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