A General Equilibrium Analysis of Inflation and Microfinance in Developing Countries

Daniel Müller ()
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Daniel Müller: University of Basel
Authors registered in the RePEc Author Service: Daniel Mueller ()

Working papers from Faculty of Business and Economics - University of Basel

Abstract: This paper analyses the welfare effects of microfinance and inflation in developing countries. Therefore, we introduce a moral hazard problem into a monetary search model with money and credit. We show how access to basic financial services affects households' decisions to borrow, to save and to hold money balances. The group lending mechanism of the microfinance institution induces peer monitoring, which in turn enables entrepreneurship. Our main result is that there exists an inflation threshold beyond which entrepreneurship collapses. We show that inflation affects the impact of microfinance on social welfare in a nonlinear way. The positive effect of microfinance is largest for moderate rates of inflation and drops substantially for inflation rates above the threshold.

Keywords: Microfinance; Moral Hazard; Group Lending; Peer Monitoring and Monetary Policy (search for similar items in EconPapers)
JEL-codes: D82 E44 G21 O16 (search for similar items in EconPapers)
Date: 2013-04-01
New Economics Papers: this item is included in nep-cwa, nep-dge, nep-ent and nep-mfd
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Persistent link: https://EconPapers.repec.org/RePEc:bsl:wpaper:2013/06

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