Junior Research Seminar: Francesco Pappadà (PSE – Banque de France)

Title: "Informality and fiscal policy under sovereign risk" (joint with Yanos Zylberberg, U. Bristol)

Date: 12 April 2023 from 11:00 to 13:00
Event location: Auditorium - Piazza Scaravilli, 2 + Microsoft Teams Meeting

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.

Invited by: Paolo Vanin
Local Organizer: Paolo Vanin