Monetary Policy Transmission and Informal Employment: Insights from HouseholdLevel Data.
Labor informality is a major global phenomenon, affecting over 61% of the world’s workforce. Despite its scale, the macroeconomic impact of labor informality, particularly its interaction with monetary policy, is not well understood. This paper explores the influence of labor informality on the transmission mechanisms of monetary policy, focusing on developing economies where informality dominates the labor market. Utilizing detailed householdlevel data from Peru’s National Household Survey (ENAHO) spanning 2012 to 2022, a country with a significant informal sector, we examine how consumption and employment patterns of informal workers amplify the effects of monetary policy. Our findings suggest that informal workers, who often belong to handtomouth households, have a higher marginal propensity to consume (MPC) and are more sensitive to economic fluctuations due to limited access to financial services. By incorporating these factors into a TwoAgent New Keynesian (TANK) model, we show that monetary policy shocks have a more pronounced impact on output and inflation in economies with large informal labor markets. This study highlights the need for policymakers to account for the distinctive characteristics of informal labor markets when designing effective monetary policies. I Link to paper.
