Informality and Formality: Fiscal Policy in DSGE Model

25 Pages Posted: 15 Mar 2014

See all articles by Jesús Botero

Jesús Botero

Universidad EAFIT; Universidad EAFIT - School of Economics and Finance - Center for Research in Economic & Finance (CIEF)

Christian Vargas

Universidad EAFIT - School of Economics and Finance - Center for Research in Economic & Finance (CIEF)

Alvaro Hurtado

Universidad EAFIT - School of Economics and Finance - Center for Research in Economic & Finance (CIEF)

Humberto Gonzalez

Universidad EAFIT - School of Economics and Finance - Center for Research in Economic & Finance (CIEF)

Date Written: March 11, 2014

Abstract

We develop a DSGE model of the Colombian economy to assess the effect of tax policy on informal employment and income distribution.The model recreates a small open economy, with persistent income inequality, a substantial degree of informality, and different possibilities of government intervention. This paper evaluates the consequences of government transfer payments to households with lower incomes. We find that although transfer payments have a positive effect on income distribution, financing them requires an adjustment in government finances (cut spending or increase revenue through the use of various taxes), which have negative effects on the economic as a whole.

Keywords: public expenditure, exogenous shock, DSGE

JEL Classification: E62, D58

Suggested Citation

Botero, Jesús and Vargas, Christian and Hurtado, Alvaro and Gonzalez, Humberto, Informality and Formality: Fiscal Policy in DSGE Model (March 11, 2014). Center for Research in Economics and Finance (CIEF), Working Papers, No. 14-06, Available at SSRN: https://ssrn.com/abstract=2408629 or http://dx.doi.org/10.2139/ssrn.2408629

Jesús Botero

Universidad EAFIT ( email )

Carrera 49 N° 7 sur – 50
Bogotá, Antioquia 00000
Colombia

Universidad EAFIT - School of Economics and Finance - Center for Research in Economic & Finance (CIEF) ( email )

Carrera 49 No. 7 South - 50
Bogotá
Colombia

Christian Vargas

Universidad EAFIT - School of Economics and Finance - Center for Research in Economic & Finance (CIEF) ( email )

Carrera 49 No. 7 South - 50
Bogotá
Colombia

Alvaro Hurtado (Contact Author)

Universidad EAFIT - School of Economics and Finance - Center for Research in Economic & Finance (CIEF) ( email )

Carrera 49 No. 7 South - 50
Bogotá
Colombia

Humberto Gonzalez

Universidad EAFIT - School of Economics and Finance - Center for Research in Economic & Finance (CIEF) ( email )

Carrera 49 No. 7 South - 50
Bogotá
Colombia

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