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The Dynamics of Informality and Fiscal Policy under Sovereign Risk

Author

Listed:
  • Francesco Pappada

    (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 - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - ENPC - École nationale des ponts et chaussées - IP Paris - Institut Polytechnique de Paris, PJSE - Paris Jourdan Sciences Economiques - 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 - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - ENPC - École nationale des ponts et chaussées - IP Paris - Institut Polytechnique de Paris, Université de Venise Ca’ Foscari | Università Ca’ Foscari di Venezia)

  • Yanos Zylberberg

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

Abstract

This paper examines how the dynamics of informality affects optimal fiscal policy and default risk. We build a model of sovereign debt with limited commitment and informality to assess the consequences of dynamic distortions induced by fiscal policy. In the model, fiscal policy has a persistent impact on taxable activity, which affects future fiscal revenues and thus default risk. The interaction of tax distortions and limited commitment strongly constrains the dynamics of optimal fiscal policy and leads to (i) more frequent default episodes and (ii) costly fluctuations in consumption.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Francesco Pappada & Yanos Zylberberg, 2025. "The Dynamics of Informality and Fiscal Policy under Sovereign Risk," PSE-Ecole d'économie de Paris (Postprint) hal-05344174, HAL.
    • Handle: RePEc:hal:pseptp:hal-05344174
    DOI: 10.1086/739336
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