The effect of monetary policy transmission channels on the size of the informal economy in Iran

Document Type : Scientific-research

Authors

1 Department of Humanity, Bozorgmehr University of Qaenat

2 Department of Industrial Engineering, Faculty of Engineering, Bu-Ali Sina University, Hamedan, Iran

10.30465/ce.2024.48221.1954

Abstract

The informal economy plays a significant role in economies, influencing their overall performance and stability. Reducing the negative effects of the informal economy requires a balanced combination of policies. Monetary policy, along with its transmission channels, directly and indirectly, have positive or negative consequences on the activities of both formal and informal economies. In this study, it is investigated the effect of various monetary policy tools, including interest rates, bank credit ratio, and exchange rate changes, on the size of the informal economy in Iran. An asymmetric Autoregressive Distributed Lag (ARDL) model is used to analyze the relationship between these variables during the period of 2017-2018. The results indicate the negative effect of the monetary policy credit channel on the informal economy. Additionally, the exchange rate channel shows a positive effect, while the interest rate channel has a negative effect on the informal economy, and these coefficients are asymmetric. The coefficients of inflation rate and the ratio of liquidity to GDP also show a positive effect. Therefore, policymakers can utilize monetary policies to control the informal economy by implementing measures such as increasing the granting of bank credits, controlling inflation, and managing the exchange rate.

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History

  • Receive Date: 05 February 2024
  • Revise Date: 06 May 2024
  • Accept Date: 10 July 2024

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