Transitional Growth with Increasing Inequality and Financial Deepening

IMF Working Papers, August 1, 2001

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Transitional Growth with Increasing Inequality and Financial Deepening

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Bibliographic details

• Authors: Kenichi Ueda
• Published: August 1, 2001
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451853100.001

Summary and main findings

• The paper studies models that display growth with financial deepening and increasing inequality along the way to perpetual steady state growth.
• A benchmark model is essentially a complete markets model but with transaction costs of financial intermediation.
• New proofs are required and provided for stochastic dynamic programming for:
  • the case of unbounded return functions, and
  • perpetual growth with a non-convex transaction technology.
• The model is calibrated and quantitative predictions are reported for Thailand during 1976-96.
• Key empirical finding: a discrepancy is found between the model and the data for Thailand; the author suspects barriers to financial deepening as a cause and evaluates the associated welfare loss.

Model, methods, and technical contributions

• Model features:
  • Complete markets baseline modified by transaction costs of financial intermediation.
  • Non-convex transaction technology.
• Technical contributions:
  • New proofs for stochastic dynamic programming accommodating unbounded return functions.
  • Formal treatment of perpetual growth in the presence of non-convex transaction technologies.
• Important technical terms preserved from the source: transaction costs, financial intermediation, stochastic dynamic programming, unbounded return functions, non-convex transaction technology, value function, functional equation.

Calibration, quantitative predictions, and empirical evaluation

• Calibration scope: Thailand during 1976-96.
• Empirical outcome:
  • Quantitative predictions from the calibrated model do not fully match observed data for Thailand over 1976-96.
  • The paper interprets the discrepancy as potentially arising from barriers to financial deepening.
  • The paper evaluates the welfare loss associated with such barriers.

Policy implications and interpretation

• Suggested interpretation: barriers to financial deepening can explain the divergence between model predictions and observed data.
• Welfare assessment: the paper evaluates the welfare loss associated with limited financial deepening (details of the magnitude and decomposition are in the Working Paper).

Subject areas and keywords

• Subject: Banking, Consumption, Economic sectors, Financial sector, Income distribution, Income inequality, National accounts, Population and demographics
• Keywords: Asia and Pacific, capital level, confidence interval, Consumption, critical value, economy data source, financial deepening, Financial sector, fixed cost, functional equation, Income distribution, Income inequality, inequality, parameter value, participation rate, population distribution, portfolio share, savings rate, setting parameter, transaction costs, Transitional growth, transitional value, value function, values function, WP

Content in this bundle

• Transitional Growth with Increasing Inequality and Financial Deepening - WP/01/108
  • Transitional Growth with Increasing Inequality and Financial Deepening - WP/01/108 (Markdown version)
  • Transitional Growth with Increasing Inequality and Financial Deepening - WP/01/108 (PDF)