The Dynamics of Informality and Fiscal Policy under Sovereign Risk

Francesco Pappada*, Yanos Zylberberg*

*Corresponding author for this work

Research output: Contribution to journal › Article (Academic Journal) › peer-review

2 Downloads (Pure)

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, social 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.
Original languageEnglish
JournalJournal of Political Economy Macroeconomics
Early online date24 Oct 2025
DOIs
Publication statusE-pub ahead of print - 24 Oct 2025

Bibliographical note

© 2025 The University of Chicago.

Access to Document

  • Full-text PDF (accepted manuscript)

    This is the accepted author manuscript (AAM) of the article which has been made Open Access under the University of Bristol's Scholarly Works Policy. The final published version (Version of Record) can be found on the publisher's website. The copyright of any third-party content, such as images, remains with the copyright holder.

    Accepted author manuscript, 2.19 MBLicence: CC BY

Handle.net

    Fingerprint

    Dive into the research topics of 'The Dynamics of Informality and Fiscal Policy under Sovereign Risk'. Together they form a unique fingerprint.
    View full fingerprint

    Cite this