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.

In this paper, we explore the response of optimal monetary policy to uncoordinated trade policies, namely foreign tariff shocks. We provide a model of an open economy with heterogeneous firms and nominal rigidities where foreign tariff shocks induce a sluggish adjustment in the labor market between domestic and exporter firms, giving an incentive for the monetary authority to intervene. We find that the dispersion of firm productivity determines the degree of the monetary policy response to external tariff shocks. We corroborate our theoretical findings by providing empirical evidence on the response of domestic monetary policy to foreign tariff shocks using data on Global Antidumping from the U.S.

Recessions are conventionally considered as times of cleansing as the least productive firms are driven out of the market. In this paper, we use a comprehensive administrative dataset of Portuguese firms over 2004-2023 to study the selection of firms at the exit margin over the business cycle. We find two main results: i) while there is no evidence of cleansing during recessions, the least productive firms tend to exit more during growth slowdowns; ii) low-TFP firms are more likely to become zombies during slowdowns than recessions. We show that low-TFP firms turn into zombie firms rather than exit during recessions, and the delayed exit of zombie firms explains the blurred selection at the exit margin during recessions.