BdF paper models tax evasion’s impact on sovereign default

Widespread tax evasion should be taken into account by international institutions dealing with countries in economic crisis, argues a working paper recently published by the Banque de France.

In Sovereign default and imperfect tax enforcement, Francesco Pappadà and Yanos Zylberberg present a model where sovereign debt is affected by two factors linked to domestic policy. The first is imperfect tax enforcement, and the second is “limited commitment” by the government to avoid default on its own