Fiscal Multipliers and Informality
IMF Working Papers, May 6, 2022
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Bibliographic details
- Authors: Emilio Colombo, Davide Furceri, Pietro Pizzuto, Patrizio Tirelli
- Published: May 6, 2022
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400209055.001
Authors and publication
- By Emilio Colombo, Davide Furceri, Pietro Pizzuto, Patrizio Tirelli
- May 6, 2022
- IMF Working Papers Series, Working Paper No. 2022/082
- Pages: 73
- Issue: 082
- DOI: https://doi.org/10.5089/9798400209055.001
- ISBN: 9798400209055
- ISSN: 1018-5941
Research question and methodology
- Investigates the role of informality in affecting the magnitude of the fiscal multiplier.
- Empirical approach: local projections method applied to a panel of 141 countries.
- Theoretical approach: two-sector new-Keynesian model used to rationalize empirical findings.
Key empirical findings
- Strong negative relationship between the degree of informality and the size of the fiscal multiplier.
- The negative relationship holds irrespective of:
- levels of economic development
- institutional quality
- Robustness: result is robust to additional country characteristics such as:
- trade
- financial openness
- exchange rate regime
Theoretical mechanisms (model insights)
- Fiscal shocks raise the relative price of official goods, shifting demand towards the informal sector.
- 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.
- Consequence: informality raises the size of the unofficial multiplier.
- Additional channel: a higher degree of non-separability between public and private goods contributes to lower multipliers in high-informality countries.
Subject areas and keywords
- 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
IMF Working Paper: "Fiscal Multipliers and Informality" (Working Paper No. 2022/082) by Emilio Colombo, Davide Furceri, Pietro Pizzuto, and Patrizio Tirelli, May 6, 2022.
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