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

By Era Dabla-Norris, Yan Ji, Robert M. Townsend, Filiz D Unsal

January 27, 2015

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Era Dabla-Norris, Yan Ji, Robert M. Townsend, and Filiz D Unsal. Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality: A Structural Framework for Policy, (USA: International Monetary Fund, 2015) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Collateral, Credit, Financial inclusion, Financial institutions, Financial markets, Income inequality, Labor, Money, National accounts, Self-employment

Keywords: Collateral, Cost of capital, Credit, Credit regime, Financial inclusion, Gini coefficient, Hetergenous agents, Income distribution, Income inequality, Inequality, Intermediation cost, Lending interest rate, Optimal contract, Participation cost, Self-employment, WP

Publication Details

Pages:

49
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/022
Stock No:

WPIEA2015022
ISBN:

9781498381598
ISSN:

1018-5941

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