Research in Progress

Abstract

Fiscal rules have increased in popularity since they help to strength the fiscal position in developing countries. However, popular fiscal rules (as the Balance Budget Rules rules) restrict the path of government spending over the business cycle in a suboptimal manner. These rules imply a spending path that is not countercyclical and do not consider the differences between types of expenditures. Thus, popular fiscal rules not only fail to guide fiscal policy along an optimal path, but can prevent the fiscal authority from reaching such path.

As an alternative to these rules, this paper proposes a countercyclical fiscal rule that imposes a sustainable path for debt and considers the differences between types of expenditures. To derive such a rule a standard macroeconomic model that considers the production of a public good and the role of transfers in smoothing consumption and reducing inequality is developed. The optimal policy is then derived from the model. The proposed budget rule is a simplification of this optimal policy. 

In this rule, transfers are given by two components: a structural component and a cyclical component, the latter determined by deviations of beneficiaries' incomes from their trend. Similarly, government services are driven by a structural component and a cyclical component, based on deviations of real government wages from their trend. The structural components and trends are defined to ensure the fiscal rule aligns with a sustainable debt level. Specifically, for each variable, the trend is determined by the discounted present value of the variable over a specified number of periods.

The paper compares welfare under the new rule and the typical budget rules to show how the new countercyclical rule is preferred.

Abstract

Informal work is often considered a place of employment for marginalized and vulnerable workers who have been rationed out of preferred formal work. However, informality can also be seen as a dynamic sector that budding entrepreneurs and those looking for flexible working conditions enter voluntarily. This paper builds on Günther and Launov (2012) to test the voluntary and involuntary nature of informal work in Costa Rica. Expanding their work, the paper considers the possibility that workers value, not only expected earnings but also the possibility of transitioning to other sectors or into unemployment. 

Our results suggest that considering the probability of moving across sectors and into unemployment is relevant to measuring the share of involuntary informality, especially for women. In the case of Costa Rica, when taking into account these transition probabilities more than 90 percent of all informal workers are involuntarily informal, however, when only expected earnings are considered the share of involuntary informal work falls to 66 percent. If in addition, it is assumed that workers cannot move between self-employed and salaried jobs, this share drops to about 60 percent.

Abstract

Informal workers typically earn less, face unemployment more frequently, and have limited access to financial institutions, making them strong candidates for unemployment benefits (UBs). However, an important share of informal workers lack the formal employment history needed to qualify for UBs, and therefore, they do not have access to unemployment insurance. 

Extending benefits to these informal workers is challenging, since distinguishing between an informal and an unemployed worker is an arduous task. As an informal worker can be mistaken for unemployed, offering UBs to those in the informal sector creates opportunities for false claims. To tackle this issue, the paper propose the use of conditional transfers to extend UBs to informal workers, tailoring the program's design to reduce the degree of false claims. Two policy scenarios emerge based on the relative income of informal workers.

When informal wages are high, transfers are more generous, requiring less conditions, as higher earnings reduce incentives for fraud. However, increased transfers necessitate higher taxes, potentially driving formal workers into informality. Conversely, when informal wages are low, transfers are smaller and tied to stricter conditions to prevent informal workers from falsely claim UBs.

How the optimal set of transfers, the size of the informal sector, the unemployment rate, and welfare levels depend on informal wages is analyzed by calibrating an simulating the model.

Abstract

In response to negative shocks that reduce output and depreciate the currency, emerging markets face a monetary policy dilemma. Should they increase policy rates to defend the currency at the cost of aggravating the slowdown/recession (procyclical monetary policy) or should they reduce policy rates to stimulate output at the cost of further depreciation? (countercyclical monetary policy). We develop a simple model to formalize this critical policy dilemma.