The Macroeconomics of Microfinance
FRB of St. Louis Working Paper No. 2013-034A
43 Pages Posted: 6 Nov 2013
Date Written: February 29, 2012
We provide a quantitative evaluation of the aggregate and distributional impact of microfinance or credit programs targeted toward small businesses. We find that the redistributive impact of microfinance is stronger in general equilibrium than in partial equilibrium, but the impact on aggregate output and capital is smaller in general equilibrium. Aggregate total factor productivity (TFP) increases with microfinance in general equilibrium but decreases in partial equilibrium. When general equilibrium effects are accounted for, scaling up the microfinance program will have only a small impact on per-capita income, because the increase in TFP is counterbalanced by lower capital accumulation resulting from the redistribution of income from high-savers to low-savers. Nevertheless, the vast majority of the population will be positively affected by microfinance through the increase in equilibrium wages.
Keywords: microfinance, entrepreneurship, general equilibrium effect
JEL Classification: G21, O11, O16
Suggested Citation: Suggested Citation