Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality: A Structural Framework for Policy

50 Pages Posted: 23 Feb 2015

See all articles by Era Dabla-Norris

Era Dabla-Norris

International Monetary Fund (IMF)

Yan Ji

Hong Kong University of Science & Technology (HKUST)

D. Filiz Unsal

International Monetary Fund (IMF) - Research Department

Robert M. Townsend

Massachusetts Institute of Technology (MIT)

Date Written: January 2015

Abstract

We develop a micro-founded general equilibrium model with heterogeneous agents to identify pertinent constraints to financial inclusion. We evaluate quantitatively the policy impacts of relaxing each of these constraints separately, and in combination, on GDP and inequality. We focus on three dimensions of financial inclusion: access (determined by the size of participation costs), depth (determined by the size of collateral constraints resulting from limited commitment), and intermediation efficiency (determined by the size of interest rate spreads and default possibilities due to costly monitoring). We take the model to a firm-level data from the World Bank Enterprise Survey for six countries at varying degrees of economic development — three low-income countries (Uganda, Kenya, Mozambique), and three emerging market countries (Malaysia, the Philippines, and Egypt). The results suggest that alleviating different financial frictions have a differential impact across countries, with country-specific characteristics playing a central role in determining the linkages and tradeoffs between inclusion, GDP, inequality, and the distribution of gains and losses.

Keywords: Financial services, Income inequality, Gross domestic product, Income distribution, Low-income developing countries, Emerging markets, General equilibrium models, Financial inclusion, hetergenous agents., credit, gdp, wealth, costs, economy, savings, choice, capital, utility, development, interest, moral hazard, production, wages, consumption, investment, interest rate, asymmetric information, interest rates, gdp per capita, financial sector, welfare, trade, utility function, economic growth, regression analysis, distribution of wealth, variables, total factor productivity, inefficiency, macroeconomic analyses, diminishing returns to scale, m2, production function, expected utility, risk neu

JEL Classification: E23, E44, E69, O11, O16, O57

Suggested Citation

Dabla-Norris, Era and Ji, Yan and Unsal, D. Filiz and Townsend, Robert M., Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality: A Structural Framework for Policy (January 2015). IMF Working Paper No. 15/22, Available at SSRN: https://ssrn.com/abstract=2568597

Era Dabla-Norris (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Yan Ji

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

D. Filiz Unsal

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Robert M. Townsend

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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