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

Journal Article
Published on 1 January 2021

Working paper available through PEDL. Article forthcoming.

Abstract

A general equilibrium model featuring multiple realistic sources of financial frictions is developed to study how different constraints interact in equilibrium. Townsend, Dabla-Norris, Ji and Unsal (forthcoming) highlight, distinguish, and evaluate their differential impacts and rich interactions. The economic impact of financial inclusion policies in an economy depends not only on which constraint is alleviated, but also on the tightness of other constraints. Policy instruments should target the most binding constraint, which likely varies across countries. Moreover, there are important tradeoffs between financial inclusion, GDP, and the distribution of income. The transitional dynamics also differ from those in steady states. Policy makers should consider both.

Authors

Era Dabla-Norris

International Monetary Fund

Yan Ji

Hong Kong University of Science and Technology

Robert M. Townsend

Massachusetts Institute of Technology

D. Filiz Unsal

International Monetary Fund