Working Papers

Tax evasion, informality, and optimal monetary policy (Download)

With Jean-Oliver Hairault. An early version of this paper circulate before with the title ''Optimal monetary policy with informality: a first pass''

Abstract: Our paper aims to unveil how much monetary policy shall deviate from the flexible-price allocation in an economy with a large informal sector. First of all, the presence of variable taxes in the formal sector generates an inflation bias under a discretionary policy, which increases with the size of the informal sector. Secondly, we find that only the formal sector is responsible for the cost-push shocks that are amplified in a more informal economy. The trade-off between inflation and the formal output gap is then dependent on the elasticity of the former variable with respect to the formal output gap. However, the optimal management of inflation also depends on the elasticity of the informal output gap with respect to the formal output gap. As this elasticity is decreasing with the size of the informal sector, whether inflation volatility (in terms of the aggregate output gap) is lower or higher in a more informal economy is ambiguous. By simulation, we show that economies with a larger informal sector should stabilize less inflation relative to the total output gap.

Job Polarization and the informal labor market (Download)  

Abstract: This paper analyses the incidence of job polarization in developing and emerging countries, where a substantial fraction of the urban labor force works in the informal sector. I build a general equilibrium model with informality and endogenous occupational choice. Workers in the informal sector do not pay taxes, are less productive, and have the same ability to perform manual tasks. The analytical solution of the model shows that job polarization, driven by a Routine-Biased Technological Change (RBTC), increases the size of the informal sector. Additionally, I find that the share of informal employment in the service sector and the wage inequality at the bottom of the skill distribution decrease with technological progress.

Work in progress

Fiscal Policy and Informality in Colombia

With Fernando Jaramillo and Andres Garcia

Abstract: This paper studies how informality reacts to fiscal policy instruments. We develop an analytical framework with a dual labor market with frictions, where the formal sector, in contrast to the informal sector, produces with technology using capital and pay taxes. We calibrate the model for the Colombian economy and quantify to what extent a decrease in payroll taxes is effective to create formal jobs in a context where government compensates for the reduction in revenues by using other fiscal instruments, such as reducing expenditure or increasing other taxes, e.g., consumption or capital income taxes.