Money Multiplier Bias Due to Informal Sector: An Extension of the Existing Money Multiplier

2021 ◽  
pp. 227797872097988
Author(s):  
Khurrum S. Mughal ◽  
Friedrich G. Schneider ◽  
Faheem Aslam ◽  
Alishba Tahir
Keyword(s):  
Money Supply ◽  
Informal Sector ◽  
Informal Economy ◽  
Economic Policies ◽  
Official Statistics ◽  
Jel Codes ◽  
Money Multiplier ◽  
Multiplier Effect ◽  
The Impact

To demonstrate the impact of informal economy on the official money multiplier in currency supply, we present an extension of the basic money multiplier model. The influence of economic policies may differ if they are based only on official statistics without considering the informal sector. Since most of the activities in informal sector are hidden from authorities, it is widely assumed that these activities are based on cash transactions, a part of total currency that cannot be attracted towards deposits due to the holder’s fear of prosecution and taxation, etc. Therefore, it is expected that such currency holdings can give biased results by playing a role in the money multiplier, a phenomenon that is usually ignored while attempting to alter money supply. The article also indicates that because of informal sector, the currency deposit ratio in the money multiplier is smaller than expected (depending on size of the informal sector), leading to a larger multiplier effect. JEL Codes: E26, E51, O17

scholarly journals Informality and Economic Growth in Nigeria: 1980-2014

2017 ◽  
Vol 3 (3) ◽  
pp. 405 ◽  
Author(s):  
Mohammed Yelwa ◽  
A. J. Adam
Keyword(s):  
Economic Growth ◽  
Informal Sector ◽  
Informal Economy ◽  
Data Series ◽  
Formal Sector ◽  
Female Population ◽  
Demand Deposit ◽  
The Impact ◽  
Adf Test ◽  
The Relationship

<p><em>The paper examines the impact of informal sector activities on economic growth in Nigeria between 1980-2014. The contributions of informal sector activities to the growth of Nigerian economy cannot be over emphasized. It is the source of livelihood to the majority of poor, unskilled, socially marginalized and female population and is the vital means of survival for the people in the country lacking proper safety nets and unemployment insurance especially those lacking skills from formal sector jobs. The relationship between informality and economic growth is not clear because the sector is not regulated by the law also there is no concrete evidence that this sector enhances growth because the sector’s contributions to growth is not measured. The use of endogenous growth model becomes relevant in this study. The theory emphasizes the role of production on the long-run via a higher rate of technological innovation. The variables that were tested are official economy nominal GDP, informal economy nominal GDP, currency in circulation, demand deposit, ratio of currency in circulation to demand deposit, narrow money, informal economy as percentage of official economy. ADF test was conducted to establish that the data series of all variables are stationary t levels. Having established the stationarity test we also, conducted causality test of the response of official economy nominal GDP to informal economy nominal GDP. In conclusion, the impact of informal sector economy on economic growth in Nigeria is quiet commendable. Even though, the relationship between informality and economic growth is not straight. The paper recommended thus, the need for the government to integrate the activities of the informal economy into formal sector and size of the sector is measured and regulated because their roles are commendable. As it will improve tax collection and enhance fiscal policy.</em></p>

scholarly journals The Shadow Pandemic: Examining the Impact of COVID-19 on Zimbabwean Informal Sector in Chiredzi District

2021 ◽  
Vol 4 (1) ◽  
pp. 1-10
Author(s):  
Bismark Mutizwa
Keyword(s):  
Informal Sector ◽  
Informal Economy ◽  
Preventive Measures ◽  
Developing Economies ◽  
Illustrative Case ◽  
Government Grants ◽  
Remedial Actions ◽  
The Government ◽  
The Impact ◽  
Informal Traders

COVID-19 has disrupted the business sector globally, ushering developed and developing economies into an unprecedented recession beyond anything experienced in nearly a century. Governments across the globe have adopted a myriad of preventive measures. These remedial actions vary from one country to the other. Nonetheless, in Zimbabwe the government gave a blind eye on the informal sector as evidenced by the adopted preventive measures which neglected the plight of informal traders. To this end, this research interrogates the shadow pandemic in the Zimbabwean informal sector using Chiredzi District as an illustrative case study. Documentary review and key informed interviews were at the core of research methodology. The study found out that informal economy businesses are excluded from government grants, closure of businesses, failure to pay rentals, disruption of the supply chain, psychological impact and family dysfunctional are the quandaries causing a shadow pandemic. Inclusion of informal economy businesses in policies and government grants, government should negotiate with landlords, informal traders should be allowed to operate and inclusive social nets are the possible remedial actions that the government can adopted.

Does Informality Hold the Key to Growth and Stability?

2020 ◽  
Vol 66 (1) ◽  
pp. 29-45
Author(s):  
Meghna Dutta
Keyword(s):  
Economic Growth ◽  
Informal Sector ◽  
Growth Rates ◽  
Informal Economy ◽  
Developing Economies ◽  
High Growth ◽  
Political Stability ◽  
The Impact

This paper attempts to analyse the impact of a prevailing informal sector on the dynamics of growth and inflation in developing economies. The high growth rates posited by most developing economies in the presence of a huge informal sector suggest that this sector might not be the malefactor as often indicated. The main results show that the informal economy not only contributes to economic growth but the firms also help to significantly reduce inflation by generating employment and hence maintain political stability in the economy despite the existence of a huge pool of “surplus labourers”.

scholarly journals Measuring the informal economy in South Africa

2015 ◽  
Vol 8 (1) ◽  
pp. 92-101 ◽  
Author(s):  
S Saunders ◽  
E Loots
Keyword(s):  
South African ◽  
Informal Economy ◽  
Economic Activity ◽  
Economic Policies ◽  
Policy Makers ◽  
Formal Economy ◽  
Currency Demand ◽  
Policy Measures ◽  
Currency Demand Approach ◽  
The Impact

Measuring the size of the South African informal economy has received inadequate attention, making it difficult for policy-makers to assess the impact of policy measures to stimulate informal economic activity. This article aims to estimate the size of the informal economy by using the Currency Demand Approach.  The empirical results reveal that the informal economy as a percentage of GDP decreased from 1967 to 1993, before levelling off.  The growth in the informal econmy has also underperformed in comparison to formal economic growth. There appears to be a causal relationship running from the informal to the formal economy. Macro-economic policies aimed at the formal economy will not necessarily 'trickle down' to the informal, while these polcies aimed at the informal economy may have a profound effect on the formal economy.

scholarly journals The Impact of the COVID-19 Crisis on Middle-income Countries

2021 ◽  
pp. 001946622110238
Author(s):  
Sukti Dasgupta ◽  
Mauricio Dierckxsens ◽  
Sher Verick
Keyword(s):  
Developing Countries ◽  
Informal Economy ◽  
Labour Force ◽  
Middle Income ◽  
Jel Codes ◽  
Middle Income Countries ◽  
Advanced Economies ◽  
The World ◽  
The Impact

Coming on top of long-term employment challenges, the COVID-19 crisis has severely impacted economies around the world. Due to the nature of their labour markets, middle-income countries (MICs), including India, have experienced greater employment declines than advanced economies. Some sectors have been hit harder than others, while certain groups—including women, youth, migrants and those in the informal economy—have felt the brunt of the crisis even more strongly. The crisis has raised unemployment and, even more, has also pushed many out of the labour force, raising inactivity. Overall, the crisis has exacerbated existing inequalities in countries and across countries. The major challenge for MICs is to finance the continuing efforts to battle the crisis while shifting to a job-rich and inclusive recovery. Key lessons have already emerged, which are relevant for India and other developing countries, including the importance of building a more resilient and inclusive labour market through strong institutions and policies. JEL Codes: E24, E60, G01, J08, J60

scholarly journals The potential for reducing youth unemployment through informal business development in the eThekwini municipality, KwaZulu-Natal province, South Africa

2015 ◽  
Vol 4 (4) ◽  
pp. 596-604
Author(s):  
Pfano Mashau ◽  
Jennifer Houghton
Keyword(s):  
South Africa ◽  
Informal Sector ◽  
Informal Economy ◽  
Local Economic Development ◽  
Youth Unemployment ◽  
Business Development ◽  
Kwazulu Natal ◽  
Employment Goals ◽  
The Impact ◽  
Unemployment Problem

Youth unemployment is a problem that requires different diagnoses from different stakeholders, and informal business is important for local economic development. However, the youth are not much involved in the informal sector. Youth involvement in the informal sector will help address youth unemployment. This article aims to evaluate the impact of informal business development on reducing youth unemployment in the eThekwini Municipality, KwaZulu-Natal Province, South Africa. Through in-depth interviews with eThekwini Municipality officials, business support organisations and unemployed youth, assessment of supporting documents and site visits, enough data were collected to support the notion that informal business development can work to address unemployment in the municipality. The findings showed that the informal economy does not have a significant impact on completely mitigating the unemployment problem in the municipality. However, the sector is very important for economic growth and development, as well as job creation, which will begin to alleviate the unemployment problem. Thus both the formal and informal sectors of the economy need to be examined as potentially providing the first steps to achieving the long-term employment goals for the eThekwini Municipality.

scholarly journals The Impacts of China's Shadow Banking Credit Creation on the Effectiveness of Monetary Policy

2020 ◽  
Vol 9 (4) ◽  
pp. 33-46
Author(s):  
Huiyi Zhang ◽  
Richard Skolnik ◽  
Yu Han ◽  
Jinpei Wu
Keyword(s):  
Monetary Policy ◽  
Money Supply ◽  
Future Research ◽  
Shadow Banking ◽  
Leverage Ratio ◽  
Money Multiplier ◽  
Credit Creation ◽  
The Impact ◽  
Banking Credit ◽  
Effectiveness Of Monetary Policy

This paper researches the impact that shadow banking in China has upon credit creation and the potential effectiveness of monetary policy. Using a credit creation model, we derive the effect that shadow banking has upon the money multiplier and the money supply. The model shows that shadow banking can change the money multiplier, potentially increasing it during an expansion and decreasing it during a contraction. Introducing shadow banking in a CC-LM model results in a shift of the CC and LM curves resulting in a higher equilibrium output. A vector autoregressive model is used to empirically estimate the impact of shadow banking deposits' growth rate on the growth rates of the broad money supply, GDP, and the CPI. The results show that shadow banking's credit creation function in China has a pro-cyclical characteristic, potentially reducing the money supply's controllability and increasing the difficulty in effectively regulating monetary policy. This paper introduces shadow banking into the currency creation process of traditional commercial banks, accounting for the reserve requirement ratio, the excess reserve ratio, the shadow bank leakage rate, and the reserved deduction rate. Future research can determine whether coordinating monetary policy and leverage ratio regulation mitigates the impact of shadow banking. Another area of research is how the shadow banking of non-financial companies affect monetary policy.

scholarly journals The impact of eThekwini municipality policies on informal traders: a case study of the northern regions of eThekwini

2020 ◽  
Author(s):  
◽  
Trisha Ramsuraj
Keyword(s):  
South Africa ◽  
Informal Sector ◽  
Informal Economy ◽  
Local Governments ◽  
National Level ◽  
Primary Data ◽  
Primary Research ◽  
The Impact ◽  
Informal Traders

The informal economy contributes about 5.2% of the gross domestic product of South Africa. It is estimated that it employs more than 2.6 million people which represents about 10% of the total employment in the country. However, this is considered to be low if it is compared to other African countries, despite the high unemployment in the country. Therefore, there may be some constraints hindering the growth of the informal sector. The apartheid government that was in place before 1994 enacted laws and policies that hindered the growth of the sector. In recent times the South African government has been revising the laws and putting in place policies that encourage the growth of the informal economy. A number of studies have shown that eThekwini Municipality has one of the best policies which target the informal economy in South Africa. Some of the policies that have been launched include National Informal Business Upliftment Strategy at national level and Durban’s Informal Economy Policy. The current Integrated Development Plan for eThekwini Municipality has sections specially dedicated to the informal economy. Despite the efforts of the national, provincial and local governments, the policies have been failing to be more effective to achieve the intended results due to several issues. This study aims to assess and analyse the municipality’s policies that impact on the growth and prosperity of informal traders as well as the challenges that they encounter as a result of these policies. This study also monitors and evaluates the policy and implementation at municipality level. The informal traders located in the northern parts of eThekwini are focussed on as a case study. The study involved use of both secondary and primary research. In the secondary research literature review on both the informal economy and the policies that affect the people that operate within this sector was done. In the primary research structured interviews were used to gather primary data required for this study backed up by onsite observations. The results from the study show that there is lack of awareness of the informal sector policies by the informal traders. Most of the informal traders are not registered and they do not see any benefits of doing so. There is still hostility between the informal and formal traders. Informal traders highlighted a number of challenges they face every day, such as lack of shelter, storage space and running battles with law enforcers. The study showed that there was lack of involvement of the informal traders in planning such that some of the stalls that were built by the municipality remain vacant due to several issues they pointed to such as low numbers of customers in the area. The study makes some recommendations based on the findings and other studies.

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