Fiscal Multipliers and Informality

73 Pages Posted: 24 May 2022

See all articles by Emilio Colombo

Emilio Colombo

Catholic University of the Sacred Heart of Milan

Davide Furceri

International Monetary Fund (IMF)

Pietro Pizzuto

University of Palermo - d/SEAS

Patrizio Tirelli

Department of Economics and Management; Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Date Written: May 1, 2022

Abstract

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.

Keywords: Fiscal multiplier, local projection methods, informality, DSGE model, TANK model., high-informality country, role of informality, unofficial multiplier, government spending shock, investment goods producer, shadow economy variable, depreciation rate, Fiscal multipliers, Informal economy, Consumption, Global

JEL Classification: H30, H50, E26, C32, E62, E21

Suggested Citation

Colombo, Emilio and Furceri, Davide and Pizzuto, Pietro and Tirelli, Patrizio, Fiscal Multipliers and Informality (May 1, 2022). IMF Working Paper No. 2022/082, Available at SSRN: https://ssrn.com/abstract=4117832

Emilio Colombo

Catholic University of the Sacred Heart of Milan ( email )

Largo Gemelli, 1
Via Necchi 9
Milan, MI 20123
Italy

Davide Furceri (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Pietro Pizzuto

University of Palermo - d/SEAS ( email )

Viale delle Scienze, edificio 13
Palermo, 90124
Italy

Patrizio Tirelli

Department of Economics and Management ( email )

Corso Strada Nuova, 65
27100 Pavia, 27100
Italy

HOME PAGE: http://https://sites.google.com/site/patriziotirellihomepage/

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

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