Firm Dynamics, Informality, and Monetary Policy
Bibliographic record
Abstract
Abstract A prominent structural feature of many developing countries is the presence of a large shadow or informal economy, which often serves as a form of insurance during economic downturns. Despite this understanding, the impact of the informal economy on inflation and output dynamics in these countries remains poorly understood. This study investigates the extent to which monetary policy can stabilize economies with a large informal market. First, we use VAR analysis to provide new evidence indicating that the labor informality rate increases in response to contractionary monetary policy. Second, we explore the transmission mechanism of monetary policy through a two-sector New Keynesian (NK) model that incorporates endogenous firm entry. This analysis allows us to examine the role of informality in sectoral reallocation, inflation, and output dynamics. Our findings suggest that, under a reasonable calibration of the model, the presence of a flexible, informal sector results in a lower sacrifice ratio in response to a tightening of monetary policy. This suggests that informality enhances the effectiveness of monetary policy.
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How this classification was reachedexpand
Full frame distilled prediction
Teacher imitationNot calibrated prevalence, not ground truth. Human validation pending. Learned from the 10,348 direct Codex labels and 10,348 direct Gemma labels. Candidate is the union of thresholded teacher heads; consensus is their intersection. These outputs are machine_predicted_unvalidated and are not human labels or direct frontier model labels.
Codex and Gemma teacher scores by category
| Category | Codex | Gemma |
|---|---|---|
| Metaresearch | 0.001 | 0.000 |
| Meta-epidemiology (narrow) | 0.000 | 0.000 |
| Meta-epidemiology (broad) | 0.000 | 0.000 |
| Bibliometrics | 0.000 | 0.000 |
| Science and technology studies | 0.000 | 0.000 |
| Scholarly communication | 0.000 | 0.000 |
| Open science | 0.000 | 0.000 |
| Research integrity | 0.000 | 0.000 |
| Insufficient payload (model declined to judge) | 0.000 | 0.000 |
Machine scores (provisional)
The two teacher heads of the student model, read on this work. A score orders the frame for review; it never asserts a category, and the validation status ships verbatim with every row.
Baseline scores from an immature model (maturity gate not passed, 7 training rounds). Scores rank; they never assert a category.
score_only:v0-immature-baseline · verbatim from the scoring run: score_only means the number may rank works, and no category label ships from itClassification
machine, unvalidatedMachine predicted; a candidate call from one teacher head, not a consensus.
How this classification was reached, model by model and score by score, is at the end of the page under "How this classification was reached".