This JOIE symposium features some of the most influential papers presented in the seventh version... more This JOIE symposium features some of the most influential papers presented in the seventh version of the conference on The shadow economy, tax behaviour, and institutions. Accordingly, it brings together contributions from several disciplines and schools of thought in the social sciences and the humanities exploring such issues as the role of formal and informal institutions in understanding the shadow economy, the importance of social aversion in the motivations for tax compliance, and the dual nature of corruption. This introduction lays out the scope of the symposium, summarises the preceding literature on the topic, and provides a brief outline of each contributing article, noting that, although each paper focuses on a different economic and cultural context, they share several elements in common with alternative theories addressing the institutional, psychological, and sociological aspects of tax law compliance and other appropriate behaviours.
Working Paper Red Investigadores de Economía, Dec 5, 2020
Este trabajo tiene como objetivos ofrecer una visión panorámica acerca de la economía informal, s... more Este trabajo tiene como objetivos ofrecer una visión panorámica acerca de la economía informal, sus determinantes y principales características en el caso colombiano; y, también, explorar las consecuencias de este fenómeno a nivel macroeconómico, enfatizando en los posibles efectos de la informalidad sobre los rasgos específicos de los ciclos económicos en los países emergentes, particularmente en el comportamiento de la política fiscal en Colombia. Para ello, se efectúa una revisión de la literatura pertinente buscando establecer conexiones entre estos aspectos. Se concluye que la debilidad institucional del país no solo incide en una proporción considerable de la economía informal con respecto al PIB, sino que refuerza el impacto de esta sobre la postura procíclica (o desestabilizadora) de la política fiscal. En este sentido, se requiere que el gobierno ajuste sus instrumentos de política en torno a una senda estabilizadora a la par que promueva la formalización laboral y empresarial.
This article examines the aggregate implications of several policies aimed at removing barriers t... more This article examines the aggregate implications of several policies aimed at removing barriers to formality. To this end, we build a dynamic equilibrium model in which heterogeneous agents choose to work for a wage or operate a technology in the formal or informal sector, based on the costs and benefits associated with these occupational choices. Formality entails compliance with taxes, a minimum wage scheme, and firm operation costs but has a productivity advantage stemming from access to external finance and legal enforcement mechanisms. Informal activities avoid taxes and regulations without detection or punishment. The simulation results suggest that eliminating formal operation fees leads to firm formalization, earnings redistribution, and increases in total factor productivity and welfare. In addition, eliminating the income tax reduces labor informality. These two policies, taken together, generate full formalization and gains in redistribution, efficiency, and welfare that are even greater than when all the barriers to formality are jointly removed. In contrast, eliminating the minimum wage has strong adverse effects on labor formalization and little impact on productivity. Eliminating the payroll tax leaves the occupational composition nearly unchanged and productivity and welfare as well.
This paper investigates optimal consumption and retirement choices in an environment without labo... more This paper investigates optimal consumption and retirement choices in an environment without labor market frictions but in which agents face liquidity constraints. To this end, we characterize the optimal savings strategy and the threshold level of assets associated with the decision to retire or not, which in turn yield the optimal consumption and work choices. In line with the literature, we show that wealth plays a crucial role since it determines whether or not it is optimal to save and then to retire. However, our results differ from the conventional view as we find that, for those workers with low levels of assets, retirement is never optimal regardless of income uncertainty.
In this paper we build an incomplete-markets model with heterogeneous households and firms to stu... more In this paper we build an incomplete-markets model with heterogeneous households and firms to study the aggregate effects of saving constraints and credit constraints in general equilibrium. We calibrate the model using survey data from Colombia, a developing country in which informal saving and credit frictions are pervasive. Our quantitative results suggest that reducing savings costs increases selection into formal saving, but the effect on aggregate outcomes and welfare is dwarfed by that of a policy which ameliorates borrowing constraints. Such a policy improves resource allocation and increases returns to capital and labor, resulting in higher savings and welfare gains for both households and firms.
Despite the worldwide prevalence of informality, consensus on a reliable and consistent set of dr... more Despite the worldwide prevalence of informality, consensus on a reliable and consistent set of drivers and consequences of this phenomenon has been elusive to both researchers and policymakers. This study partly addresses this shortcoming by exploring the interactions between the informal economy and tax policy and how these are shaped by business cycle fluctuations. To this end, we identify robust determinants of both informality and taxation by means of an econometric analysis that accounts for bi-directional causality. Focusing on two different dimensions of informal activity and three tax policy instruments and employing numerous determinants over dozens of model combinations, we find that the significance of the relationship between informality and taxation depends on the specific tax instrument under consideration. Thus, informal economic activity may particularly affect the design of corporate taxes. Also, the business cycle may have distinctive influences on informality and tax policy, so direct taxes appear to be acyclical or countercyclical while indirect taxes are strongly procyclical. We conclude by noting how the cyclicality of the informal economy and taxation might allow to substantiate evidence on the role of informality in the adoption of potentially destabilizing fiscal policies.
A key step to promoting smart growth in urban environments is the reclamation of dilapidated, und... more A key step to promoting smart growth in urban environments is the reclamation of dilapidated, underutilized or abandoned contaminated urban sites, also known as brownfields. Brownfield redevelopment promotes smart growth because it promotes land reuse in urban areas and economic and community vitality. Various transportation-related parameters influence the impact of brownfield restoration on the overall contribution to urban revitalization, such as the proximity of the developed property to public transport, highways and intersection density. Indexing schemes such as LEED ND can be utilized to assess these parameters and the smart growth potential of a brownfield. However, for a brownfield redevelopment project the environmental attributes of the contaminated land are equally important. Moreover, socioeconomic factors such as property values and the demographics of an area may be important for decision makers and fund allocation. This paper explores a prioritization scheme for brow...
Este artículo pretende profundizar en los detalles relativos a la enunciación del concepto capita... more Este artículo pretende profundizar en los detalles relativos a la enunciación del concepto capital natural, mostrando que si bien sus inicios se remontan a una polémica diferente de aquella a la cual este concepto ha hecho sus mayores aportes, también atañe a la relevancia de la tierra en la producción. Para ello, se abordan y ponen en contraste las nociones y debates en los que se ha planteado el concepto aludido.
Las relaciones entre medio ambiente y economía han cobrado importancia en los últimos años como c... more Las relaciones entre medio ambiente y economía han cobrado importancia en los últimos años como consecuencia de las crisis energéticas y ambientales asociadas a los procesos de desarrollo económico. En este documento se ilustran los principios que han sustentado dichas relaciones y la forma como la Ciencia Económica los ha incorporado en su marco teórico.
In this study, we present an indexing scheme to screen large numbers of brownfield sites in wide ... more In this study, we present an indexing scheme to screen large numbers of brownfield sites in wide areas (municipalities, counties, states or other types of districts) in order to develop initial planning strategies for fund allocation and redevelopment. The scheme entails three dimensions, socioeconomic, smart growth and environmental, for each of which an index is constructed on the basis of location-specific variables irrespective of the target end use. Socioeconomic variables include population density, property values and unemployment which collectively represent the potential contribution of brownfield redevelopment to economic growth. The smart growth or livability index was developed on the basis of the LEED ND evaluation scheme of the U.S. Green Building Council, isolating location-specific features. Finally, the environmental index incorporates variables that represent the potential source of contamination (past use), pathway of exposure (soil permeability) and receptors (zoning, proximity to water bodies, parks, critical habitats, open spaces, wetlands and floodplains). The application of the indices to the City of New Haven, Connecticut as a case study yielded four priority sites out of 47 in the city inventory. Even though the indices were sensitive to the chosen weights, prioritization of sites in clusters reduced the effect; the top four sites were identical in the case study and 31 out of 47 sites were present in the same cluster regardless of the weighting scheme.
A key step to promoting urban revitalization is the reclamation of abandoned or underutilized con... more A key step to promoting urban revitalization is the reclamation of abandoned or underutilized contaminated sites, also known as brownfields. Effective brownfield redevelopment approaches require environmental, socioeconomic and urban planning dimensions to be integrated into policies. The most common approach to incorporate such dimensions is to evaluate specific redevelopment projects for a single site and decision support tools have been developed for that purpose. In this study, the authors present a decision support tool to prioritize brownfield redevelopment options based on their location characteristics as a basis for developing redevelopment priorities. This tool incorporates and aggregates location-specific variables into three indices: socioeconomic, smart growth and environmental. Its application to the city of New Haven, Connecticut as a case study demonstrates a general prioritization scheme that can be used by urban planners and public agencies to develop strategic pla...
The informal sector is an extensive phenomenon in developing countries. While some of its implica... more The informal sector is an extensive phenomenon in developing countries. While some of its implications have drawn considerable attention in the literature, one relatively unexplored aspect has to do with the saving patterns of workers and firms and how these might influence aggregate savings and wealth inequality. In this paper, we aim to fill that gap by examining both entrepreneurs' and workers' choices regarding whether to perform informally and regarding asset accumulation. Specifically, we build an occupational choice model wherein saving is primarily motivated by precautionary considerations. The model features labor and capital market segmentation, and is calibrated to replicate the saving rates, wealth inequality and composition of occupations across the formal and informal sectors of Colombia. Computational experiments further allow us to analyze the effects of highly debated formalization policies on wealth redistribution and promotion of saving and entrepreneurship. Alternative frameworks are finally considered.
La teoría económica y sus modelos anteponen como condiciones para el crecimiento sostenible los r... more La teoría económica y sus modelos anteponen como condiciones para el crecimiento sostenible los rendimientos de escala, la sustitución entre factores productivos y el progreso tecnológico. En el presente trabajo se propugna por una revisión de tales condiciones, particularmente de la sustitución entre recursos naturales y capital construido por el hombre y del cambio técnico, acorde con el reconocimiento de la inevitable escasez física de los recursos, concomitante a las acciones del ser humano en un mundo regido por restricciones termodinámicas. Al respecto, se analiza el papel que dichas condiciones desempeñan en las teorías del crecimiento económico con recursos, a la vez que se indican sus limitaciones y objeciones desde una perspectiva biofísica. Finalmente, se efectúa una breve reflexión acerca de cuán inapropiadas son las representaciones teóricas de las actividades económicas para dar cuenta del crecimiento en presencia de recursos naturales que se agotan o degradan.
Purpose
The purpose of this paper is to study the implications of borrowing constraints characte... more Purpose
The purpose of this paper is to study the implications of borrowing constraints characterizing the informal sector for macroeconomic volatility.
Design/methodology/approach
To this end, the author develops a simple dynamic stochastic general equilibrium model wherein registered activity not only is the basis to determine tax liabilities, but also serves as collateral for securing debts. Such a framework allows for computational experiments to analyze the effect of informality on aggregate fluctuations.
Findings
The experiments show that the credit-constrained informal sector does exert a significant influence on the cyclical volatility of consumption and investment.
Originality/value
There are not many studies addressing the implications of informal economic activities for macroeconomic fluctuations. This paper contributes to the literature by developing a theoretical model showing that credit constraints characterizing these activities might play a non-negligible role in explaining the cyclical volatility of some important aggregates.
La hipótesis de la Curva Ambiental de Kuznets (EKC) propone la existencia de una relación en form... more La hipótesis de la Curva Ambiental de Kuznets (EKC) propone la existencia de una relación en forma de U invertida entre la degradación ambiental y el ingreso per capita. Se ha asumido que esta relación implica que el crecimiento económico eventualmente revertirá los impactos ambientales de las primeras etapas del desarrollo económico. Estudios recientes, como el de Perman y Stern (2003), han mostrado que los métodos econométricos utilizados en los estudios iniciales de la EKC son inapropiados dadas las propiedades temporales de las series. Este trabajo analiza la validez de la hipótesis de la EKC para un panel de 46 países y 20 períodos, implementando pruebas individuales y de panel tanto para raíz unitaria como para cointegración. Se estima, además, un modelo de corrección de error para el panel. Los resultados no apoyan la existencia de una EKC común a los países analizados.
Within the literature on business cycles featuring underground activities, there is an approach b... more Within the literature on business cycles featuring underground activities, there is an approach based on the arguable premise that these are countercyclical. This paper develops a real business cycle model without such an assumption. Preferences are additively separable in formal and underground labor. Further, leisure time is spent on irregular work and non-market activities. Simulations permit examining how the model performs and comparing the results with related findings. Also, computational experiments allow analyzing the effects of taxes, enforcement and tastes for underground labor on aggregate fluctuations. These experiments offer a comprehensive view of the cyclical implications of the shadow economy.
This JOIE symposium features some of the most influential papers presented in the seventh version... more This JOIE symposium features some of the most influential papers presented in the seventh version of the conference on The shadow economy, tax behaviour, and institutions. Accordingly, it brings together contributions from several disciplines and schools of thought in the social sciences and the humanities exploring such issues as the role of formal and informal institutions in understanding the shadow economy, the importance of social aversion in the motivations for tax compliance, and the dual nature of corruption. This introduction lays out the scope of the symposium, summarises the preceding literature on the topic, and provides a brief outline of each contributing article, noting that, although each paper focuses on a different economic and cultural context, they share several elements in common with alternative theories addressing the institutional, psychological, and sociological aspects of tax law compliance and other appropriate behaviours.
Working Paper Red Investigadores de Economía, Dec 5, 2020
Este trabajo tiene como objetivos ofrecer una visión panorámica acerca de la economía informal, s... more Este trabajo tiene como objetivos ofrecer una visión panorámica acerca de la economía informal, sus determinantes y principales características en el caso colombiano; y, también, explorar las consecuencias de este fenómeno a nivel macroeconómico, enfatizando en los posibles efectos de la informalidad sobre los rasgos específicos de los ciclos económicos en los países emergentes, particularmente en el comportamiento de la política fiscal en Colombia. Para ello, se efectúa una revisión de la literatura pertinente buscando establecer conexiones entre estos aspectos. Se concluye que la debilidad institucional del país no solo incide en una proporción considerable de la economía informal con respecto al PIB, sino que refuerza el impacto de esta sobre la postura procíclica (o desestabilizadora) de la política fiscal. En este sentido, se requiere que el gobierno ajuste sus instrumentos de política en torno a una senda estabilizadora a la par que promueva la formalización laboral y empresarial.
This article examines the aggregate implications of several policies aimed at removing barriers t... more This article examines the aggregate implications of several policies aimed at removing barriers to formality. To this end, we build a dynamic equilibrium model in which heterogeneous agents choose to work for a wage or operate a technology in the formal or informal sector, based on the costs and benefits associated with these occupational choices. Formality entails compliance with taxes, a minimum wage scheme, and firm operation costs but has a productivity advantage stemming from access to external finance and legal enforcement mechanisms. Informal activities avoid taxes and regulations without detection or punishment. The simulation results suggest that eliminating formal operation fees leads to firm formalization, earnings redistribution, and increases in total factor productivity and welfare. In addition, eliminating the income tax reduces labor informality. These two policies, taken together, generate full formalization and gains in redistribution, efficiency, and welfare that are even greater than when all the barriers to formality are jointly removed. In contrast, eliminating the minimum wage has strong adverse effects on labor formalization and little impact on productivity. Eliminating the payroll tax leaves the occupational composition nearly unchanged and productivity and welfare as well.
This paper investigates optimal consumption and retirement choices in an environment without labo... more This paper investigates optimal consumption and retirement choices in an environment without labor market frictions but in which agents face liquidity constraints. To this end, we characterize the optimal savings strategy and the threshold level of assets associated with the decision to retire or not, which in turn yield the optimal consumption and work choices. In line with the literature, we show that wealth plays a crucial role since it determines whether or not it is optimal to save and then to retire. However, our results differ from the conventional view as we find that, for those workers with low levels of assets, retirement is never optimal regardless of income uncertainty.
In this paper we build an incomplete-markets model with heterogeneous households and firms to stu... more In this paper we build an incomplete-markets model with heterogeneous households and firms to study the aggregate effects of saving constraints and credit constraints in general equilibrium. We calibrate the model using survey data from Colombia, a developing country in which informal saving and credit frictions are pervasive. Our quantitative results suggest that reducing savings costs increases selection into formal saving, but the effect on aggregate outcomes and welfare is dwarfed by that of a policy which ameliorates borrowing constraints. Such a policy improves resource allocation and increases returns to capital and labor, resulting in higher savings and welfare gains for both households and firms.
Despite the worldwide prevalence of informality, consensus on a reliable and consistent set of dr... more Despite the worldwide prevalence of informality, consensus on a reliable and consistent set of drivers and consequences of this phenomenon has been elusive to both researchers and policymakers. This study partly addresses this shortcoming by exploring the interactions between the informal economy and tax policy and how these are shaped by business cycle fluctuations. To this end, we identify robust determinants of both informality and taxation by means of an econometric analysis that accounts for bi-directional causality. Focusing on two different dimensions of informal activity and three tax policy instruments and employing numerous determinants over dozens of model combinations, we find that the significance of the relationship between informality and taxation depends on the specific tax instrument under consideration. Thus, informal economic activity may particularly affect the design of corporate taxes. Also, the business cycle may have distinctive influences on informality and tax policy, so direct taxes appear to be acyclical or countercyclical while indirect taxes are strongly procyclical. We conclude by noting how the cyclicality of the informal economy and taxation might allow to substantiate evidence on the role of informality in the adoption of potentially destabilizing fiscal policies.
A key step to promoting smart growth in urban environments is the reclamation of dilapidated, und... more A key step to promoting smart growth in urban environments is the reclamation of dilapidated, underutilized or abandoned contaminated urban sites, also known as brownfields. Brownfield redevelopment promotes smart growth because it promotes land reuse in urban areas and economic and community vitality. Various transportation-related parameters influence the impact of brownfield restoration on the overall contribution to urban revitalization, such as the proximity of the developed property to public transport, highways and intersection density. Indexing schemes such as LEED ND can be utilized to assess these parameters and the smart growth potential of a brownfield. However, for a brownfield redevelopment project the environmental attributes of the contaminated land are equally important. Moreover, socioeconomic factors such as property values and the demographics of an area may be important for decision makers and fund allocation. This paper explores a prioritization scheme for brow...
Este artículo pretende profundizar en los detalles relativos a la enunciación del concepto capita... more Este artículo pretende profundizar en los detalles relativos a la enunciación del concepto capital natural, mostrando que si bien sus inicios se remontan a una polémica diferente de aquella a la cual este concepto ha hecho sus mayores aportes, también atañe a la relevancia de la tierra en la producción. Para ello, se abordan y ponen en contraste las nociones y debates en los que se ha planteado el concepto aludido.
Las relaciones entre medio ambiente y economía han cobrado importancia en los últimos años como c... more Las relaciones entre medio ambiente y economía han cobrado importancia en los últimos años como consecuencia de las crisis energéticas y ambientales asociadas a los procesos de desarrollo económico. En este documento se ilustran los principios que han sustentado dichas relaciones y la forma como la Ciencia Económica los ha incorporado en su marco teórico.
In this study, we present an indexing scheme to screen large numbers of brownfield sites in wide ... more In this study, we present an indexing scheme to screen large numbers of brownfield sites in wide areas (municipalities, counties, states or other types of districts) in order to develop initial planning strategies for fund allocation and redevelopment. The scheme entails three dimensions, socioeconomic, smart growth and environmental, for each of which an index is constructed on the basis of location-specific variables irrespective of the target end use. Socioeconomic variables include population density, property values and unemployment which collectively represent the potential contribution of brownfield redevelopment to economic growth. The smart growth or livability index was developed on the basis of the LEED ND evaluation scheme of the U.S. Green Building Council, isolating location-specific features. Finally, the environmental index incorporates variables that represent the potential source of contamination (past use), pathway of exposure (soil permeability) and receptors (zoning, proximity to water bodies, parks, critical habitats, open spaces, wetlands and floodplains). The application of the indices to the City of New Haven, Connecticut as a case study yielded four priority sites out of 47 in the city inventory. Even though the indices were sensitive to the chosen weights, prioritization of sites in clusters reduced the effect; the top four sites were identical in the case study and 31 out of 47 sites were present in the same cluster regardless of the weighting scheme.
A key step to promoting urban revitalization is the reclamation of abandoned or underutilized con... more A key step to promoting urban revitalization is the reclamation of abandoned or underutilized contaminated sites, also known as brownfields. Effective brownfield redevelopment approaches require environmental, socioeconomic and urban planning dimensions to be integrated into policies. The most common approach to incorporate such dimensions is to evaluate specific redevelopment projects for a single site and decision support tools have been developed for that purpose. In this study, the authors present a decision support tool to prioritize brownfield redevelopment options based on their location characteristics as a basis for developing redevelopment priorities. This tool incorporates and aggregates location-specific variables into three indices: socioeconomic, smart growth and environmental. Its application to the city of New Haven, Connecticut as a case study demonstrates a general prioritization scheme that can be used by urban planners and public agencies to develop strategic pla...
The informal sector is an extensive phenomenon in developing countries. While some of its implica... more The informal sector is an extensive phenomenon in developing countries. While some of its implications have drawn considerable attention in the literature, one relatively unexplored aspect has to do with the saving patterns of workers and firms and how these might influence aggregate savings and wealth inequality. In this paper, we aim to fill that gap by examining both entrepreneurs' and workers' choices regarding whether to perform informally and regarding asset accumulation. Specifically, we build an occupational choice model wherein saving is primarily motivated by precautionary considerations. The model features labor and capital market segmentation, and is calibrated to replicate the saving rates, wealth inequality and composition of occupations across the formal and informal sectors of Colombia. Computational experiments further allow us to analyze the effects of highly debated formalization policies on wealth redistribution and promotion of saving and entrepreneurship. Alternative frameworks are finally considered.
La teoría económica y sus modelos anteponen como condiciones para el crecimiento sostenible los r... more La teoría económica y sus modelos anteponen como condiciones para el crecimiento sostenible los rendimientos de escala, la sustitución entre factores productivos y el progreso tecnológico. En el presente trabajo se propugna por una revisión de tales condiciones, particularmente de la sustitución entre recursos naturales y capital construido por el hombre y del cambio técnico, acorde con el reconocimiento de la inevitable escasez física de los recursos, concomitante a las acciones del ser humano en un mundo regido por restricciones termodinámicas. Al respecto, se analiza el papel que dichas condiciones desempeñan en las teorías del crecimiento económico con recursos, a la vez que se indican sus limitaciones y objeciones desde una perspectiva biofísica. Finalmente, se efectúa una breve reflexión acerca de cuán inapropiadas son las representaciones teóricas de las actividades económicas para dar cuenta del crecimiento en presencia de recursos naturales que se agotan o degradan.
Purpose
The purpose of this paper is to study the implications of borrowing constraints characte... more Purpose
The purpose of this paper is to study the implications of borrowing constraints characterizing the informal sector for macroeconomic volatility.
Design/methodology/approach
To this end, the author develops a simple dynamic stochastic general equilibrium model wherein registered activity not only is the basis to determine tax liabilities, but also serves as collateral for securing debts. Such a framework allows for computational experiments to analyze the effect of informality on aggregate fluctuations.
Findings
The experiments show that the credit-constrained informal sector does exert a significant influence on the cyclical volatility of consumption and investment.
Originality/value
There are not many studies addressing the implications of informal economic activities for macroeconomic fluctuations. This paper contributes to the literature by developing a theoretical model showing that credit constraints characterizing these activities might play a non-negligible role in explaining the cyclical volatility of some important aggregates.
La hipótesis de la Curva Ambiental de Kuznets (EKC) propone la existencia de una relación en form... more La hipótesis de la Curva Ambiental de Kuznets (EKC) propone la existencia de una relación en forma de U invertida entre la degradación ambiental y el ingreso per capita. Se ha asumido que esta relación implica que el crecimiento económico eventualmente revertirá los impactos ambientales de las primeras etapas del desarrollo económico. Estudios recientes, como el de Perman y Stern (2003), han mostrado que los métodos econométricos utilizados en los estudios iniciales de la EKC son inapropiados dadas las propiedades temporales de las series. Este trabajo analiza la validez de la hipótesis de la EKC para un panel de 46 países y 20 períodos, implementando pruebas individuales y de panel tanto para raíz unitaria como para cointegración. Se estima, además, un modelo de corrección de error para el panel. Los resultados no apoyan la existencia de una EKC común a los países analizados.
Within the literature on business cycles featuring underground activities, there is an approach b... more Within the literature on business cycles featuring underground activities, there is an approach based on the arguable premise that these are countercyclical. This paper develops a real business cycle model without such an assumption. Preferences are additively separable in formal and underground labor. Further, leisure time is spent on irregular work and non-market activities. Simulations permit examining how the model performs and comparing the results with related findings. Also, computational experiments allow analyzing the effects of taxes, enforcement and tastes for underground labor on aggregate fluctuations. These experiments offer a comprehensive view of the cyclical implications of the shadow economy.
Uploads
The purpose of this paper is to study the implications of borrowing constraints characterizing the informal sector for macroeconomic volatility.
Design/methodology/approach
To this end, the author develops a simple dynamic stochastic general equilibrium model wherein registered activity not only is the basis to determine tax liabilities, but also serves as collateral for securing debts. Such a framework allows for computational experiments to analyze the effect of informality on aggregate fluctuations.
Findings
The experiments show that the credit-constrained informal sector does exert a significant influence on the cyclical volatility of consumption and investment.
Originality/value
There are not many studies addressing the implications of informal economic activities for macroeconomic fluctuations. This paper contributes to the literature by developing a theoretical model showing that credit constraints characterizing these activities might play a non-negligible role in explaining the cyclical volatility of some important aggregates.
The purpose of this paper is to study the implications of borrowing constraints characterizing the informal sector for macroeconomic volatility.
Design/methodology/approach
To this end, the author develops a simple dynamic stochastic general equilibrium model wherein registered activity not only is the basis to determine tax liabilities, but also serves as collateral for securing debts. Such a framework allows for computational experiments to analyze the effect of informality on aggregate fluctuations.
Findings
The experiments show that the credit-constrained informal sector does exert a significant influence on the cyclical volatility of consumption and investment.
Originality/value
There are not many studies addressing the implications of informal economic activities for macroeconomic fluctuations. This paper contributes to the literature by developing a theoretical model showing that credit constraints characterizing these activities might play a non-negligible role in explaining the cyclical volatility of some important aggregates.