Informality and macroeconomic fluctuations: A small open economy New Keynesian DSGE model with dual labour markets

Sisay Senbeta ()

Working Papers from University of Antwerp, Faculty of Business and Economics

Abstract: How do key macroeconomic variables of a small open economy with segmented labour markets behave in response to domestic and external shocks? In this paper we attempt to address this question by modeling the coexistence of a formal labour market with higher wage rates and search frictions, and an informal labour market with the opposite attributes in the standard multi-sector small open economy New Keynesian DSGE model. The model is calibrated for a typical Sub-Saharan African economy and the behaviour of key macroeconomic variables in response to domestic and external shocks is analysed. The results show that almost all the impulse response functions of our model are consistent with what theory predicts and what other empirical works show about the responses of low income countries to the shocks we consider. However, our results do not seem to corroborate the widely held wisdom that the existence of an informal sector plays a stabilizing role in the event of shocks.

Keywords: Dual labor markets; Informal sector; Open economy; New Keynesian DSGE; Low-income countries; Sub-Saharan Africa (search for similar items in EconPapers)
JEL-codes: E24 E26 E32 E41 O55 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2013-02
New Economics Papers: this item is included in nep-afr, nep-iue, nep-mac and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:ant:wpaper:2013002

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