Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/299479 
Year of Publication: 
2023
Series/Report no.: 
IDB Working Paper Series No. IDB-WP-1499
Publisher: 
Inter-American Development Bank (IDB), Washington, DC
Abstract: 
This paper presents a comprehensive framework examining fiscal sustainabil- ity in developing economies. It integrates public capital, labor informality, and global liquidity shocks in a two-sector DSGE model for a small open economy, revealing their intricate interplay and nonlinear impact on State-Dependent Debt Limits. The framework highlights the significance of initial public capital levels and efficiency in determining the benefits of public investment. High informality rates erode the tax base, compromising the efficiency of public capital for fiscal purposes by weakening revenue generation relative to costs. Adverse global liq- uidity shocks may significantly contract the fiscal limit distribution only if they are perceived as permanent. Through model calibration and sensitivity exercises on Colombia's fiscal limit distribution, quantitative analyses shed light on un- derlying mechanisms. Findings challenge the frequent practice of cutting public investment in response to declining revenues, emphasizing it can actually reduce fiscal space. The framework underscores the importance of assessing fiscal pol-icy consolidations aimed at ensuring debt sustainability and responses to global shocks using a structural model, while stressing the fiscal benefits of informality-reducing reforms.
Subjects: 
Public debt
Labor informality
Public Investment
Fiscal limit
Fiscal space
Fiscal sustainability
Global liquidity
JEL: 
E32
E62
H20
H30
H50
H60
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Working Paper

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