Study analyzes impact of informality in labor markets on inflation stabilization and monetary policy offering new insights on MPT. 

About Monetary Policy (MP)

• MP is a set of actions available to a nation's central bank (RBI in India) to achieve sustainable economic growth & Maintaining price stability by adjusting money supply.
• Statutory Basis: RBI, Act,1934 (amended in 2016).
• MP Framework: Central Government, in consultation with RBI, determines inflation target in terms of Consumer Price Index (CPI) every 5 years.
  • Flexible Inflation Targeting: Currently, it is 4% (with a tolerance of +/- 2%) till March, 2026. 
• Tools: Direct and indirect instruments like Repo Rate, Reverse Repo Rate etc. 
• Types: Expansionary (Lowering interest rate to stimulate economic activity); and Contractionary (Increasing interest rate to slow down activity and prevent inflation)

Key findings of Study

• MP Transmission: Improves with more formality in the labor market. 
• Impact on Unemployment: Contractionary Monetary Policy (CMP) leads to Rise in unemployment in both formal and informal markets. 
• Impact on Macroeconomic variables:  Contractionary Monetary Policy (CMP) leads to a decline in aggregate consumption, inflation, investment, output, capital stock, etc.