LAMP, informality and monetary growth rules in an emerging economy

Maryam Mirfatah, Vasco Gabriel and Paul Levine ()

Economic Modelling, 2025, vol. 143, issue C

Abstract: We develop a small open economy model interacting with a rest-of-the-world bloc, containing relevant emerging economies’ features: heterogeneous agents with one household type displaying limited asset markets participation (LAMP), and an informal sector. We show that monetary growth rules are stable regardless of the level of asset market participation, i.e., unlike standard interest rate rules, they avoid the inversion of the Taylor principle. Estimation results using data from Mexico reveal that specifications with money growth rules are empirically superior and shocks are amplified by the presence of LAMP. In contrast, the informal sector acts as a buffer, lowering the variability of aggregate and formal fluctuations through an expenditure switching effect, and by providing a flexible labour market adjustment mechanism.

Keywords: Emerging economies; Informality; Heterogeneous agents; Limited asset market participation; Money growth rules (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:143:y:2025:i:c:s0264999324003031

DOI: 10.1016/j.econmod.2024.106946

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