Informality and macroeconomic volatility: do credit constraints matter?
Abstract
Purpose
The purpose of this paper is to study the implications of borrowing constraints characterizing the informal sector for macroeconomic volatility.
Design/methodology/approach
To this end, the author develops a simple dynamic stochastic general equilibrium model wherein registered activity not only is the basis to determine tax liabilities, but also serves as collateral for securing debts. Such a framework allows for computational experiments to analyze the effect of informality on aggregate fluctuations.
Findings
The experiments show that the credit-constrained informal sector does exert a significant influence on the cyclical volatility of consumption and investment.
Originality/value
There are not many studies addressing the implications of informal economic activities for macroeconomic fluctuations. This paper contributes to the literature by developing a theoretical model showing that credit constraints characterizing these activities might play a non-negligible role in explaining the cyclical volatility of some important aggregates.
Keywords
Acknowledgements
JEL Classification — E26, E32, E44, H26, O17
This paper is an extensively revised version of the third chapter of the author ' s dissertation. The author is indebted to Christian Zimmermann and Shalini Mitra for valuable comments in earlier stages. The author also has benefited from suggestions from seminar participants at the University of Connecticut, University of Münster, Bocconi University, Université du Maine and Universidad de Antioquia. In particular, the author would like to thank Jordi Caballé, Stéphane Gauthier, François Langot, Julio Leal-Ordóñez, Remberto Rhenals, Bernd Theilen and one anonymous referee for encouragement and helpful discussions. All errors, however, are the author ' s own. Financial assistance from Universidad de Antioquia through the CODI Research Fund is gratefully acknowledged.
Citation
Granda Carvajal, C. (2015), "Informality and macroeconomic volatility: do credit constraints matter?", Journal of Economic Studies, Vol. 42 No. 6, pp. 1095-1111. https://doi.org/10.1108/JES-03-2014-0043
Publisher
:Emerald Group Publishing Limited
Copyright © 2015, Emerald Group Publishing Limited