## Informality, Frictions, and Macroprudential Policy

_IMF Working Papers, November 27, 2019_

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## Bibliographic details
- Authors: Moez Ben Hassine, Nooman Rebei
- Published: November 27, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498320856.001

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### Summary
- The paper analyzes the effects of macroprudential policies using an estimated dynamic stochastic general equilibrium (DSGE) model tailored to developing markets.
- Informality is explicitly introduced in the labor and goods markets within a small open economy framework that includes financial frictions, nominal and real rigidities, labor search and matching, and an explicit banking sector.
- The estimated model is used to run welfare analysis under optimized monetary and macroprudential rules.
- Main headline result: informality reduces the efficiency of macroprudential policies following a convex fashion, but combining macroprudential policy with an inflation targeting objective could be beneficial.

### Model and methods
- Framework: estimated DSGE model for a small open economy.
- Key model features:
  - Explicit informality in labor and goods markets.
  - Financial frictions.
  - Nominal and real rigidities.
  - Labor search and matching.
  - Explicit banking sector.
- Analysis approach: welfare analysis under optimized monetary and macroprudential rules using the estimated model.

### Key findings
- Informality lowers the effectiveness of macroprudential policy.
- The reduction in efficiency caused by informality follows a convex relationship.
- Joint policy design (macroprudential policy combined with an inflation targeting objective) can yield beneficial outcomes relative to macroprudential policy alone.

### Policy implications and recommendations
- Design macroprudential policy acknowledging the presence and quantitative effects of informality in labor and goods markets.
- Consider combining macroprudential tools with an inflation targeting objective to improve welfare outcomes.
- Optimize monetary and macroprudential rules jointly rather than in isolation to account for interactions driven by informality and financial frictions.

*Informality, Frictions, and Macroprudential Policy, Moez Ben Hassine and Nooman Rebei, IMF Working Papers, November 27, 2019.*

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_Source: https://www.imf.org/en/publications/wp/issues/2019/11/27/informality-frictions-and-macroprudential-policy-evidence-from-tunisia-47014_