This doctoral thesis is a collection of three independent articles in the field of Macroeconomics written during my period as PhD student at Stanford University. They have the common characteristic of being motivated by questions that, in my view, pertain mostly to emerging market economies.The first two articles were written in close collaboration with my friend Gustavo Pereira, who is currently a fellow PhD student at Columbia University. These two chapters study different aspects of informal labor hiring, or informality, which is common and widespread in developing economies, but which also affects - perhaps in a distinct format - advanced economies. The third article, written entirely by myself, studies a medium-scale, New Keynesian model in the presence of fiscal dominance. The main goal is to study the properties of deficit financing in emerging markets. In particular, the extent to which news about public finances change the perceived value of public debt and, therefore, inflation.In the rest of this introduction, I present a more detailed summary of the questions, methods and results of each chapter.The first article (chapter 2) studies the effects of public policies designed to fight informal labor activity. We propose a general equilibrium model with heterogeneous agents in which the income process follows from a search model. We calibrate it to generate stylized income/informality facts from Brazilian household-level data. Firms opt between offering formal or informal contracts and have heterogeneous ability to operate informally. Such heterogeneity leads some productive firms to choose informal contracts. It allows the model to produce similar income averages among high-income workers in the formal and informal sector, a property we find in the data. We then use the model to simulate the economy’s response to the repression of informal labor activity by the government. Our simulation suggests that short and long-run impacts differ. General equilibrium effects matter for both. In the long run, households’ welfare and average firm productivity improve, and 1 unemployment decreases. However, in the short run, reduced aggregate savings leads to a 4% increase in interest rates and a 2.5% increase in the unemployment rate. We also show that if the government fails to transfer back to households the additional tax revenue, these effects hold in the long run as well. In addition, if the policy is anticipated by economic agents, then output declines and informality increases prior to implementation. In all cases, households with greater wealth experience larger welfare gains.The second article (chapter 3) focuses on the share on informality share, of the share of informal jobs among total jobs, which increases in downturns and decreases in booms. We provide a novel channel to explain this stylized fact. The key insight is that the breakdown of the workforce into formal and informal jobs over the business cycle behaves like the weights of an aggregate portfolio. Hiring a worker formally has advantages in terms of productivity, but is inherently risky due to severance payment requirements that prevent the termination of labor contracts that become unprofitable during recessions.
