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

Robert Townsend, Era Dabla-Norris, Yan Ji and Filiz Unsal

No 11742, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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-codes: C54 E23 E44 E69 O11 O16 O57 (search for similar items in EconPapers)
Date: 2017-01
New Economics Papers: this item is included in nep-dge, nep-ent and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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