Informal Credit Markets and the Transmission of Monetary Policy: Evidence from South Korea

Seth B. Carpenter

Review of Development Economics, 1999, vol. 3, issue 3, 323-335

Abstract: This paper is an empirical investigation of the transmission of monetary policy in South Korea. It combines modern mainstream macroeconomics with aspects of a developing economy with financial dualism through a simple IS‐LM type model that explicitly incorporates an informal credit market. Vector autoregression analysis, with both semistructural and structural identifications, confirms the importance of a credit variable as a policy tool. The results show direct credit allocation by the central bank had a significant impact on output, prices, and the interest rate in the informal sector. Previous theoretical and empirical findings of “stagflationary” effects of monetary policy are refuted.

Date: 1999
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