Fiscal Multipliers and Informality

By Emilio Colombo, Davide Furceri, Pietro Pizzuto, Patrizio Tirelli

May 6, 2022

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Emilio Colombo, Davide Furceri, Pietro Pizzuto, and Patrizio Tirelli. Fiscal Multipliers and Informality, (USA: International Monetary Fund, 2022) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Consumption, Economic sectors, Expenditure, Fiscal multipliers, Fiscal policy, Informal economy, National accounts

Keywords: Consumption, Depreciation rate, DSGE model, Fiscal multiplier, Fiscal multipliers, Global, Government spending shock, High-informality country, Informal economy, Informality, Investment goods producer, Local projection methods, Role of informality, Shadow economy variable, TANK model., Unofficial multiplier

Publication Details

Pages:

73
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/082
Stock No:

WPIEA2022082
ISBN:

9798400209055
ISSN:

1018-5941

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