Informal Credit Markets and Financial Underdevelopment: Evidence from Money Demand in India

Pradeep Srivastava
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Pradeep Srivastava: Harvard University

Indian Economic Review, 1993, vol. 28, issue 2, 141-156

Abstract: Using macro search costs and trading externalities, this paper attempts to highlight the underdeveloped nature of the informal financial markets. An equilibrium is depicted, with aggregate credit demand determined, to show that the supply curve of, (potential) credit may be horizontal in the presence of these markets, analogously to Lewis' (1974) unlimited supply to labor in dual economics. An implication of the analysis is a negative impact of informal sector output on money demand in addition to the usual scale effect. This proposition is tested for the Indian economy using buffer stock and error correction models of money demand.

JEL-codes: E41 (search for similar items in EconPapers)
Date: 1993
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