Monetary Policy and Informal Finance

This article utilises state-level data for 1961-2012 to examine the interlinkage between informal finance and monetary policy. The analysis suggests that in response to a monetary contraction, borrowing from moneylenders declines, whereas that from landlords and relatives increases. In addition, the evidence also supports a hierarchy among the preferred financing choices. A key takeaway is that monetary policy needs to take on board its impact on the hitherto neglected informal sector.