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Financial Segmentation and Transmission of Monetary and Real Shocks : Implications for Consumption, Labour, and Credit Distribution

Author

Listed:
  • Madiha MUNIR

    (National University of Science and Technology (NUST), Islamabad, Pakistan. Corresponding author.)

  • Saira TUFAIL

    (Fatima Jinnah Women University (FJWU), Rawalpindi, Pakistan)

  • Ather Maqsood AHMED

    (National University of Science and Technology (NUST), Islamabad, Pakistan)

Abstract

The study examines the transmission mechanism of domestic and foreign monetary policy shocks in an economy with financial segmentation. We address how local and international shocks affect the users of formal and informal finance in terms of consumption, labour, and credit in a New-Keynesian Dynamic Stochastic General Equilibrium Model. We demonstrated that domestic monetary policy is less successful when the formal financial sector competes with the informal sector for lending. For foreign monetary policy shock, formal financial sector provides the complete hedge. The study also showed that informal loans are considered inferior means of financing for informal borrowers. It is recommended that incorporating feedback from the informal sector in the conduct of monetary policy is expected to improve its understanding and hence, effectiveness.

Suggested Citation

  • Madiha MUNIR & Saira TUFAIL & Ather Maqsood AHMED, 2023. "Financial Segmentation and Transmission of Monetary and Real Shocks : Implications for Consumption, Labour, and Credit Distribution," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 101-119, October.
    • Handle: RePEc:rjr:romjef:v::y:2023:i:3:p:101-119
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Financial sector; Informal Financial sector; Monetary Policy; DSGE Modelling; Simulations;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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