Informality and Heterogeneity: Assessing Monetary Policy Transmission in Tunisia

Mohamed Safouane Ben Aıssa and Firas Nfikha ()
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Mohamed Safouane Ben Aıssa: University of Tunis ElManar
Firas Nfikha: University of Tunis ElManar

No 1820, Working Papers from Economic Research Forum

Abstract: We evaluate the transmission of monetary policy in an economy characterized by heterogeneous households and a sizable informal sector. We construct a consumption-based measure of informality at the household level which we use to estimate the Informality Engel Curve. The results are then reproduced endogenously in a dual-sector Heterogeneous Agent New Keynesian (HANK) Model. We test the effects of informality across different model specifications and at different informal sector sizes and then estimate the model’s dynamics for the Tunisian economy using the Bayesian method in a novel framework. Our results reveal that: (i) Monetary shocks from our HANK model are stronger and more effective, in terms of sacrifice ratio, than in other specifications, but within our model, the prevalence of informality dampens transmission and increases its cost. (ii) Accounting for informality doesn’t appear to undermine the transmission of monetary shocks in Tunisia but restrictive policy favors the expansion of the informal sector and affects informal workers the least. (iii) Wealth remains the primary factor influencing household responses to monetary shocks, but employment status is particularly significant among lower-wealth households.

Pages: 35
Date: 2025-12-19, Revised 2025-12-19
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Published by The Economic Research Forum (ERF)

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