Title: Fiscal multipliers with an informal sector
Authors: Evangelia Vourvachaki - Bank of Greece (Greece) [presenting]
Dimitris Papageorgiou - Bank of Greece (Greece)
Dimitris Malliaropulos - Bank of Greece (Greece)
Harris Dellas - University of Bern (Switzerland)
Abstract: The shadow economy exaggerates the effect of fiscal policy on both official and true economic activity. We measure these effects using a model with an informal sector in the context of the recent 2010-2015 Greek fiscal consolidation experience. We find that formal output declined by 50\% more than projected (26\% vs 18\%) whereas, due to the large increase in the share of the informal sector (by 50\%), true output declined by much less (17\%). Almost one third of the formal GDP decline was due to income tax rate increases (which failed to raise extra tax revenue). Our model predicts that had the informal sector been contained to its pre-crisis size, at least one-quarter of the decline in GDP could have been averted. And that the capital controls imposed in 2015 may inadvertently have, within a year, contributed to a reduction of the share of the informal sector by almost five percentage points and to an increase in formal GDP by 2.6\%.