FISCAL IMBALANCE IN AN ECONOMY WITH INFORMALITY: Evidence from Dynamic Stochastic General Equilibrium Model
- Usman Adamu Bello
- Aliyu Rafindadi Sanusi
- ( paper pages. 1 - 30 )
Abstract
Efforts to pull the
Nigerian economy out of recession have compelled the use of expansionary fiscal
policy. This paper simulates a fiscal policy shock in a New Keynesian DSGE
model with varying sizes of informality. The model incorporates price
stickiness in the formal sector, while some degree of price flexibility, non-Ricardian
households and untaxed credit constraint are introduced in the informal sector.
In addition, government has nominal budget constraints; therefore, deficits are
financed through borrowing. The paper finds that the policy has a stabilizing-effect
on aggregate demand with relatively more informal goods consumption; the
untaxed informal sector’s goods leaks government revenue. Conversely, there is
relatively more output growth in formal firms. Informality distorts short-run
aggregate investment but such effect vanishes over time. The paper concludes
that, though expansionary fiscal policy stabilizes aggregate demand during an
economic downturn, however, the presence of a large informal sector distorts
fiscal revenue and creates fiscal imbalance.
Citation
Usman Adamu Bello, Aliyu Rafindadi Sanusi.
2024.
"FISCAL IMBALANCE IN AN ECONOMY WITH INFORMALITY: Evidence from Dynamic Stochastic General Equilibrium Model"
The Nigerian Journal of Economic and Social Studies,
66 (1): 1 - 30.
JEL Classification
H30, H31, H32, H62
