Sovereign Default and Imperfect Tax Enforcement

48 Pages Posted: 10 Jul 2019 Last revised: 18 Nov 2021

See all articles by Francesco Pappadà

Francesco Pappadà

Banque de France; Paris School of Economics (PSE)

Yanos Zylberberg

University of Bristol

Multiple version iconThere are 2 versions of this paper

Date Written: 2019

Abstract

We show that, in many countries, tax compliance is volatile and markedly responds to fiscal policy. To explore the consequence of this novel 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 impact future fiscal revenues and thus default risk. This mechanism captures one key empirical regularity of economies with imperfect tax enforcement: the low sensitivity of debt price to fiscal consolidations. The interaction of imperfect tax enforcement and limited commitment strongly constrains the dynamics of optimal fiscal policy. During default crises, high tax distortions force the government towards extreme fiscal policies, notably including costly austerity spells.

Keywords: sovereign default, imperfect tax enforcement, informal economy, fiscal policy

JEL Classification: E020, E320, E620, F410, H200

Suggested Citation

Pappadà, Francesco and Zylberberg, Yanos, Sovereign Default and Imperfect Tax Enforcement (2019). CESifo Working Paper No. 7694, Available at SSRN: https://ssrn.com/abstract=3416867 or http://dx.doi.org/10.2139/ssrn.3416867

Francesco Pappadà (Contact Author)

Banque de France ( email )

Paris
France

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

Yanos Zylberberg

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
19
Abstract Views
259
PlumX Metrics