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Informal Credit Markets and the Transmission of Monetary Policy: Evidence from South Korea

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  • Seth B. Carpenter

Abstract

This paper is an empirical investigation of the transmission of monetary policy in South Korea. It combines modern mainstream macroeconomics with aspects of a developing economy with financial dualism through a simple IS‐LM type model that explicitly incorporates an informal credit market. Vector autoregression analysis, with both semistructural and structural identifications, confirms the importance of a credit variable as a policy tool. The results show direct credit allocation by the central bank had a significant impact on output, prices, and the interest rate in the informal sector. Previous theoretical and empirical findings of “stagflationary” effects of monetary policy are refuted.

Suggested Citation

  • Seth B. Carpenter, 1999. "Informal Credit Markets and the Transmission of Monetary Policy: Evidence from South Korea," Review of Development Economics, Wiley Blackwell, vol. 3(3), pages 323-335, October.
    • Handle: RePEc:bla:rdevec:v:3:y:1999:i:3:p:323-335
    DOI: 10.1111/1467-9361.00071
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    Cited by:

    1. M. Faizul Islam, 2010. "Subrata Ghatak and Jose R. Sanchez-Fung. Monetary Economics in Developing Countries (Hampshire: Palgrave-Macmillan, 2007, pp. 320)," Journal of International Development, John Wiley & Sons, Ltd., vol. 22(7), pages 1042-1043.
    2. Khurrum S. Mughal & Friedrich G. Schneider, 2020. "How Informal Sector Affects the Formal Economy in Pakistan? A Lesson for Developing Countries," South Asian Journal of Macroeconomics and Public Finance, , vol. 9(1), pages 7-21, June.
    3. Ghosh, Saibal & Kumar, Rakesh, 2014. "Monetary policy and informal finance: Is there a pecking order?," MPRA Paper 65243, University Library of Munich, Germany.
    4. Duo Qin & Zhong Xu & Xue-Chun Zhang, 2013. "How Much Has Private Credit Lending Reacted to Monetary Policy in China? The Case of Wenzhou," Working Papers 178, Department of Economics, SOAS University of London, UK.
    5. Patrick, Chileshe M. & Akanabi, Olusegun Ayodele, 2017. "The Impact of Informal Economy on the Interest Rate Pass-through: Evidence from an ARDL model," African Journal of Economic Review, African Journal of Economic Review, vol. 5(2), July.
    6. Gunji, Hiroshi & Miura, Kazuki & Yuan, Yuan, 2009. "Bank competition and monetary policy," Japan and the World Economy, Elsevier, vol. 21(1), pages 105-115, January.
    7. Qin, Duo & Xu, Zhong & Zhang, Xuechun, 2014. "How much informal credit lending responded to monetary policy in China? The case of Wenzhou," Journal of Asian Economics, Elsevier, vol. 31, pages 22-31.
    8. Khurrum S. Mughal & Friedrich G. Schneider & Faheem Aslam & Alishba Tahir, 2021. "Money Multiplier Bias Due to Informal Sector: An Extension of the Existing Money Multiplier," South Asian Journal of Macroeconomics and Public Finance, , vol. 10(2), pages 139-157, December.
    9. Peters Idowu & Yaaba N. Baba & Adetoba O. Olufunso & Tomologu-Okunomo E. Aduni & Tonuchi E. Joseph, 2020. "How Effective is Monetary Policy in the Presence of High Informality in Nigeria," Journal of Accounting, Business and Finance Research, Scientific Publishing Institute, vol. 10(2), pages 84-93.

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