Monetary policy impact on the informal economy and response to shocks in the formal economy

Richardson Kojo Edeme, Chigozie Nelson Nkalu*, Ginika Edeh

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

In developing countries, there has been a surge in the size of the informal economy in recent years. However, the effect of monetary policy on the informal economy and informal economy responses to shocks from the formal economy is yet to receive empirical attention. Our study aims to explore monetary policy effect on the informal economy and response to shocks in the formal economy in Nigeria for 48 years (1970–2018). Using Autoregressive Distributed Lag and Impulse Response Function, we examined empirically how various monetary policy instruments affect the informal economy and responses to shocks in the formal economy. Our result indicates that credit to the private sector along with the exchange rate had a positive and significant effect on the informal economy both in the long run and short run. The estimate further indicates bank lending rate had a positive and insignificant effect on the informal economy. Our research reveals that in the short run, the informal economy responds positively to shocks in the formal economy while the reserve is the case in the long run. These results underscore the importance of factoring the informal economy in monetary policy decisions.

Original languageEnglish
Article numbere2453
Number of pages8
JournalJournal of Public Affairs
Early online date14 Sep 2020
DOIs
Publication statusE-pub ahead of print - 14 Sep 2020

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