Thursday, 27 April, 2023 | 14:00 | Macro Research Seminar

Harris Dellas (University of Bern) "Fiscal Multipliers with an Informal Sector"

Prof. Harris Dellas

University of Bern, Switzerland

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Abstract: On the eve of its sovereign debt crisis in 2010, Greece initiated a large scal consolidation program. By 2015, official GDP had fallen to 26% below its 2009 level. We feed the actual fiscal package in the DSGE model of the Bank of Greece, augmented to include an informal sector, to assess the contribution of fiscal policy -and its individual components- as well as the role played by the shadow economy. The model produces a cumulative reduction of 26% in formal and 17.5% in total output, with about half due to tax increases and the other half due to lower government spending. We establish that growth in the informal sector in response to the tax hikes signicantly amplied the negative eects on tax revenue and macroeconomic activity. More generally, we find that the shadow economy magnifies the difference between government spending and tax multipliers, providing an explanation for the Alesina-Favero-Giavazzi, 2019, findings.