Disinflating in the Shadows: Informality and Monetary Policy Effectiveness

Aniello Piscopo

No 569, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: This paper studies how labor market informality shapes monetary policy transmission in emerging economies. Using a structural VAR for Colombia, I document that after a contractionary monetary shock, informal employment declines together with aggregate output, a result robust to the COVID-19 pandemic and the nominal exchange rate. A two-sector New Keynesian model rationalizes this evidence: informality does not weaken monetary transmission but redirects it, cushioning formal output and employment relative to a fully formal benchmark while shifting more of the adjustment onto the informal sector, so aggregate output and employment fall by more, not less.

Keywords: Informal employment; Monetary policy transmission; Dual labor markets; New Keynesian model; SVAR; Emerging economies. (search for similar items in EconPapers)
JEL-codes: E24 E26 E31 E32 E52 O17 (search for similar items in EconPapers)
Pages: 48
Date: 2026-02, Revised 2026-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-iue, nep-mac and nep-mon
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