Fiscal austerity and informality: Twin deficits as a cushion in Latin American countries
Bibliographic record
Abstract
• The effectiveness of fiscal austerity is notably influenced by the size of the shadow economy. • In economies with high informality, the twin deficits phenomenon buffers the adverse impacts of austerity by facilitating exchange rate depreciation and current account adjustments. • Tax-based fiscal consolidations prove more effective for enhancing the current account balance and mitigating external vulnerabilities. This paper uncovers a new transmission channel that explains the muted effects of fiscal policy in economies with high levels of informality. Using a novel dataset on fiscal consolidations in 14 Latin American and Caribbean countries (1989–2016), I provide evidence supporting the twin deficits hypothesis in highly informal economies. Real exchange rate depreciation and improvements in the current account balance help cushion the negative impacts of fiscal consolidation. In contrast, in economies with smaller informal sectors, this mitigating effect is absent, leading to significant output contractions as a result of austerity. These findings shed new light on how informality shapes the macroeconomic consequences of fiscal policy, offering valuable insights for policymakers in emerging and developing countries.
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How this classification was reachedexpand
Full frame distilled prediction
Teacher imitationNot calibrated prevalence, not ground truth. Human validation pending. Learned from the 10,348 direct Codex labels and 10,348 direct Gemma labels. Candidate is the union of thresholded teacher heads; consensus is their intersection. These outputs are machine_predicted_unvalidated and are not human labels or direct frontier model labels.
Codex and Gemma teacher scores by category
| Category | Codex | Gemma |
|---|---|---|
| Metaresearch | 0.000 | 0.000 |
| Meta-epidemiology (narrow) | 0.000 | 0.000 |
| Meta-epidemiology (broad) | 0.000 | 0.000 |
| Bibliometrics | 0.000 | 0.000 |
| Science and technology studies | 0.000 | 0.001 |
| Scholarly communication | 0.000 | 0.000 |
| Open science | 0.000 | 0.000 |
| Research integrity | 0.000 | 0.000 |
| Insufficient payload (model declined to judge) | 0.000 | 0.000 |
Machine scores (provisional)
The two teacher heads of the student model, read on this work. A score orders the frame for review; it never asserts a category, and the validation status ships verbatim with every row.
Baseline scores from an immature model (maturity gate not passed, 7 training rounds). Scores rank; they never assert a category.
score_only:v0-immature-baseline · verbatim from the scoring run: score_only means the number may rank works, and no category label ships from itClassification
machine, unvalidatedMachine predicted; a candidate call from one teacher head, not a consensus.
How this classification was reached, model by model and score by score, is at the end of the page under "How this classification was reached".