FINANCIAL SEGMENTATION AND TRANSMISSION OF MONETARY AND REAL SHOCKS: IMPLICATIONS FOR CONSUMPTION, LABOUR, AND CREDIT DISTRIBUTION

The study examines the transmission mechanism of domestic and foreign monetary policy shocks in an economy with financial segmentation. We address how local and international shocks affect the users of formal and informal finance in terms of consumption, labour, and credit in a New -Keynesian Dynamic Stochastic General Equilibrium Model. We demonstrated that domestic monetary policy is less successful when the formal financial sector competes with the informal sector for lending. For foreign monetary policy shock, formal financial sector provides the complete hedge. The study also showed that informal loans are considered inferior means of financing for informal borrowers. It is recommended that incorporating feedback from the informal sector in the conduct of monetary policy is expected to improve its understanding and hence, effectiveness.