Research

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.

This paper offers a new approach to measuring the size of the informal economy based on VAT data for the European Union. Although data intensive, our “EVADE” measure is simpler and more transparent than existing measures. EVADE also shows more variation across countries of Europe than earlier measures, including significantly higher informality in Greece, Italy and Spain, for example.  Moreover, we find considerably higher variation within countries across time; in a cross-country time series regression, controlling for tax rates, we confirm that the informal economy grows significantly in recessions and decreases in booms, which we term the "Hugo" effect.

In this paper, we explore the response of optimal monetary policy to uncoordinated trade policies (foreign tariff shocks). We first provide a simple model of open economy with heterogeneous firms and derive a closed-form solution for the optimal monetary policy response to tariff shocks in presence of nominal rigidities. We show that optimal monetary policy is expansionary following foreign tariff hikes. Under nominal rigidities, uncertainty about foreign tariff hikes induces sluggish adjustments in the labor market reallocation between exporters and domestic firms, leading to an incentive for monetary authority to intervene and mitigate the impact of tariff shocks. In an extended model, we then show the quantitative response of our economy to a tariff shock under the Ramsey monetary policy, a Taylor Rule and a fixed exchange rate regime. Finally, we provide empirical evidence for the response of domestic monetary policy to foreign tariff shocks using data on Global Antidumping from the US.

We provide empirical evidence about the selection of firms over the business cycle using a comprehensive administrative dataset of Portuguese firms over 2004-2019. While Foster et al. (2016) focus on the manufacturing sector - and have productivity measures only for a subsample of that sector - our dataset allows us to measure productivity for a much wider sample in different industries. We find evidence of heterogeneous cleansing both between episodes of recessions and across industries: while there is no evidence of cleansing during the Great Recession, the Sovereign Debt crisis has been cleansing in some sectors, mainly in the Services.