EconPapers    
Economics at your fingertips  
 

Interaction of Formal and Informal Financial Markets in Quasi-Emerging Market Economies

Harold P.E. Ngalawa and Nicola Viegi
Authors registered in the RePEc Author Service: Nicola Viegi ()

No 326, Working Papers from Economic Research Southern Africa

Abstract: The primary objective of this paper is to investigate the interaction of formal and informal financial markets and their impact on economic activity in quasi-emerging market economies. Using a four-sector dynamic stochastic general equilibrium model with asymmetric information in the formal financial sector, we come up with three fundamental findings. First, we demonstrate that formal and informal financial sector loans are complementary in the aggregate, suggesting that an increase in the use of formal financial sector credit creates additional productive capacity that requires more informal financial sector credit to maintain equilibrium. Second, it is shown that interest rates in the formal and informal financial sectors do not always change together in the same direction. We demonstrate that in some instances, interest rates in the two sectors change in diametrically opposed directions with the implication that the informal financial sector may frustrate monetary policy, the extent of which depends on the size of the informal financial sector. Thus, the larger the size of the informal financial sector the lower the likely impact of monetary policy on economic activity. Third, the model shows that the risk factor (probability of success) for both high and low risk borrowers plays an important role in determining the magnitude by which macroeconomic indicators respond to shocks.

Keywords: Informal financial sector; formal financial sector; monetary policy; general equilibrium (search for similar items in EconPapers)
JEL-codes: E44 E47 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-iue, nep-mac and nep-mfd
Date: 2013
References: Add references at CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed

Downloads: (external link)
http://www.econrsa.org/node/653 (application/pdf)

Related works:
Journal Article: Interaction of formal and informal financial markets in quasi-emerging market economies (2013) Downloads
Working Paper: Interaction of Formal and Informal Financial Markets in Quasi-Emerging Market Economies (2013) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rza:wpaper:326

Access Statistics for this paper

More papers in Working Papers from Economic Research Southern Africa Contact information at EDIRC.
Bibliographic data for series maintained by Charles Tanton ().

 
Page updated 2019-08-20
Handle: RePEc:rza:wpaper:326