Research
Rethinking the Informal Economy and the Hugo Effect
Pappadà, Francesco, and Kenneth Rogoff
Forthcoming, Journal of the European Economic Association, vol. 23, forthcoming 2025
NBER Digest, March 2024
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.
Exchange Rate Policy and Firm Heterogeneity
Hamano, Masashige, and Francesco Pappadà
IMF Economic Review, 2023, vol. 71, no. 3., 759–790.
This paper examines the exchange rate policy in a tractable framework with heterogeneous firms, incomplete financial markets and nominal rigidities. External demand shocks generate exchange rate movements leading to uncertainty in the labor demand of exporter firms. When exporter firms are homogeneous in terms of productivity, a monetary policy response to external demand shocks stabilizes the export market and improves welfare, thus providing a rationale for managed exchange rate policies.
Pappadà, Francesco, and Yanos Zylberberg
European Economic Review, 2017, 100, 506-524.
Relying on a novel measure of VAT compliance in a panel of 35 countries, we document a robust negative association between changes in tax compliance and tax rates. In order to rationalize this finding, we develop a theoretical framework where heterogeneous firms adjust the share of declared activity. We calibrate the model using firm-level data in Greece, and find large leakages following the recent austerity plans. We then show how differences in financial development and the size of economic activity at the margin of informality are able to explain the heterogeneous response of tax compliance to tax rates across countries.
Credit Frictions and the Cleansing Effect of Recessions
Pappadà, Francesco, and Sophie Osotimehin
Economic Journal, 2017, 127, issue 602, 1153-1187.
Recessions are conventionally considered as times when the least productive firms are driven out of the market. How do credit frictions affect this cleansing effect of recessions? We build and calibrate a model of firm dynamics with credit frictions and endogenous entry and exit to investigate this question. We find that there is a cleansing effect of recessions in the presence of credit frictions, despite their effect on the selection of exiting and entering firms. This result holds true regardless of the nature of the recession: average firm-level productivity rises following a negative aggregate productivity shock, as well as following a negative financial shock. The intensity of the cleansing effect of recessions is however lower in the presence of credit frictions, especially when the recession is driven by a financial shock.
Euro Area External Imbalances and the Burden of Adjustment
di Mauro, Filippo, and Francesco Pappadà
Journal of International Money and Finance, 2014, 48(PB), 336-356.
The objective of this paper is to explore the consequences of the correction of Euro area trade imbalances on real exchange rates. This analysis requires one additional dimension with respect to the standard Global Imbalances framework à la Obstfeld and Rogoff (2005), since the adjustment takes place within and outside the Euro area. Both types of adjustments are analyzed in a three-country general equilibrium model with a tradable and a nontradable sectors, and heterogeneous firms built upon Pappadà (2011). ECB (CompNet) data are used to measure the differences in firm size and productivity dispersion across Euro area countries. With respect to the surplus country (Germany), countries running a trade deficit (Spain, Italy) are characterised by a productivity distribution with a lower mean and a less fat right tail. This increases the relative price movement associated with the external adjustment because of the limited role played by the extensive margin. We show that the real exchange rate movements are underestimated when the cross-country differences in terms of productivity distributions are neglected.
Real Adjustment of Current Account Imbalances with Firm Heterogeneity
Pappadà, Francesco
IMF Economic Review, 2011, 59, No. 3, 431-454.
In this paper, a standard model of international transfer is augmented by the introduction of firm heterogeneity. The increase in aggregate exports in response to the transfer reflects extensive and intensive adjustments, as the sales of new exporting firms (extensive margin) contribute to the current account adjustment along with the sales of existing exporting firms (intensive margin). The relative size of the intensive and extensive margins of the adjustment is determined by the size dispersion of firms. The model calibrated to the observed distribution of firm sizes shows that the intensive margin is the predominant channel of the current account adjustment. The dampening effect of the extensive margin has therefore very little impact on the exchange rate adjustment.