Sovereign default and imperfect tax enforcement

Francesco Pappadà (1, 2) , Yanos Zylberberg (3, 4)

1 PSE - Paris School of Economics
2 Banque de France - Banque de France
3 University of Bristol [Bristol]
4 CEPR - Center for Economic Policy Research

The effect of fiscal policy on default risk is mitigated by the response of tax compliance. To explore the consequences of this stylized fact, we build a model of sovereign debt with limited commitment and imperfect tax enforcement. Fiscal policy persistently affects the size of the informal economy, which impacts future fiscal revenues and default risk. The interaction of imperfect tax enforcement and limited commitment strongly constrains the dynamics of optimal fiscal policy and leads to costly uctuations in consumption.

Mots clés: Sovereign default; Imperfect tax enforcement; Fiscal policy

Domaines: Economies et finances

Francesco Pappadà, Yanos Zylberberg. Sovereign default and imperfect tax enforcement. 2021. ⟨halshs-03142208⟩