Optimal Monetary Policy in the Presence of an Informal Sector and Firm-Level Credit Constraints
AbstractWe analyze, in this paper, the optimality of pro-cyclical monetary policy in the presence of informal sector. Our findings suggest that monetary tightening only in case of severe shock with high leverage ratio and that conventional monetary policy favors both the formal and informal sectors irrespective of the severity of the shocks and hence the whole economy if the size of informal sector is significantly large. Furthermore, fixing exchange rate is better policy option if objective is to defend the employment or domestic consumption from falling when negative shock hits the economy. We can not found any disproportionate impact of policies on informal sector. This may be due to static nature of the model and it might be possible that dynamics of responses of the two sectors to shocks differ significantly.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 53169.
Date of creation: 2013
Date of revision:
Informal Sector; Credit Constraints; Exchange Rate; Monetary Policy;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- F0 - International Economics - - General
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
- O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
- O23 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-02-02 (All new papers)
- NEP-CBA-2014-02-02 (Central Banking)
- NEP-IUE-2014-02-02 (Informal & Underground Economics)
- NEP-MAC-2014-02-02 (Macroeconomics)
- NEP-MON-2014-02-02 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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