Informality, Frictions, and Macroprudential Policy

Moez Ben Hassine and Nooman Rebei

No 2019/255, IMF Working Papers from International Monetary Fund

Abstract: We analyze the effects of macroprudential policies through the lens of an estimated dynamic stochastic general equilibrium (DSGE) model tailored to developing markets. In particular, we explicitly introduce informality in the labor and goods markets within a small open economy embedding financial frictions, nominal and real rigidities, labor search and matching, and an explicit banking sector. We use the estimated version of the model to run welfare analysis under optimized monetary and macroprudential rules. Results show that although informality reduces the efficiency of macroprudential policies following a convex fashion, combining the latter with an inflation targeting objective could be beneficial.

Keywords: WP; interest rate; monetary policy; welfare gain; physical capital; inflation rate; adjustment cost; open economy; production function; interest rate rule; marginal utility; inflation targeting policy; nominal exchange rate; demand shock; Macroprudential policy; Self-employment; Consumption; Housing (search for similar items in EconPapers)
Pages: 37
Date: 2019-11-27
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-iue, nep-mac and nep-mon
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