The impact of informal economy on the interest rate pass-through: evidence from an ARDL model

Abstract

In this study, we investigated the impact of the size of the informal economy on the interest rate pass-through. Results from an ARDL model showed that higher levels of the informal sector are associated with higher lending rates. Furthermore, the results indicated that the effect of the informal economy is much stronger in the long-run compared to the short-run. Finally, the results indicated that in both the short run and long run existence of an informal economy dampens the transmission of changes in the policy rate to retail rates as expected from theory and empirical evidence.

Keywords: ARDL; Interest Rate Pass-through; Informal Economy; Monetary Policy; Zambia