Distinguishing Constraints on Financial Inclusion and Their Impact on GDP and Inequality

66 Pages Posted: 9 Jan 2017

See all articles by Era Dabla-Norris

Era Dabla-Norris

International Monetary Fund (IMF)

Yan Ji

Hong Kong University of Science & Technology (HKUST)

Robert M. Townsend

Massachusetts Institute of Technology (MIT)

D. Filiz Unsal

International Monetary Fund (IMF) - Research Department

Multiple version iconThere are 3 versions of this paper

Date Written: January 2017

Abstract

We develop a micro-founded general equilibrium model with heterogeneous agents and three dimensions of financial inclusion: access (determined by a participation cost), depth (determined by a borrowing constraint), and intermediation efficiency (determined by a monitoring cost). We find that the economic implications of financial inclusion policies vary with the source of frictions. In partial equilibrium, we show analytically that relaxing each of these constraints separately increases GDP. However, when constraints are relaxed jointly, the impacts on the intensive margin (increasing output per entrepreneur with access to credit) are amplified, while the impacts on the extensive margin (promoting credit access) are dampened. In general equilibrium, we discipline the model with firm-level data from six countries and quantitatively evaluate the policy impacts. Multiple frictions are necessary to match the country-specific variables, e.g., credit access ratio, interest rate spread, and non-performing loans. A TFP decomposition finds that most of the productivity gains are captured by a between-regime shifting effect, whereby talented entrepreneurs obtain credit and expand their businesses. In terms of inequality and welfare, reducing the participation cost benefits talented-but-poor agents the most, while relaxing the borrowing constraint or intermediation cost is more beneficial for talented-and-wealthy agents.

JEL Classification: C54, E23, E44, E69, O11, O16, O57

Suggested Citation

Dabla-Norris, Era and Ji, Yan and Townsend, Robert M. and Unsal, D. Filiz, Distinguishing Constraints on Financial Inclusion and Their Impact on GDP and Inequality (January 2017). CEPR Discussion Paper No. DP11742. Available at SSRN: https://ssrn.com/abstract=2896032

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

Robert M. Townsend

Massachusetts Institute of Technology (MIT) ( email )

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

D. Filiz Unsal

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

700 19th Street NW
Washington, DC 20431
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
0
Abstract Views
259
PlumX Metrics