Does Informality make Monetary Policymaking easier?(2018)
Informality is an entrenched structural trait in emerging market economies, despite of the progresses achieved in macroeconomic management. Informality determines the behavior of labour markets, financial access and the overall economy. Therefore it influences the transmission of shocks and also of monetary policy. This paper develops a simple general equilibrium closed economy model with informality. Informality is captured by a dual labour market where the informality rate is endogenous. Only formal sector firms have access to financing, which is instrumental in their hiring process. Informality has a buffering effect on the propagation of demand and supply shocks; the financial feature of the model boosts the impact of financial shocks in the formal sector while the informal sector is in principle unaffected. As a result informality dampens the impact of demand and supply shocks on prices and inflation but heighten the impact of financial shocks. Informality also increases the sacrifice ratio of monetary policy actions. Therefore, the answer depends on the type of shocks affecting the economy, but also of other structural features of the economy.
Publication DateJune, 2018
Citation InformationCarlos Urrutia and Enrique Alberola. "Does Informality make Monetary Policymaking easier?" (2018)
Available at: http://works.bepress.com/currutia/20/