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

This paper identifies pertinent constraints to financial inclusion using a micro-founded general equilibrium model with heterogeneous effects. It evaluates policy impacts of relaxing each of these constraints separately, and in combinations, on GDP and inequality. The paper focuses on three dimensions of financial inclusion: size of participation costs as a proxy for access, size of collateral constraints as a proxy for depth, and size of interest rate spreads and effects of costly monitoring as a proxy for intermediation efficiency. It also takes the model to firm-level data for six countries: Uganda, Kenya, Mozambique, Malaysia, Egypt, and the Philippines. The paper finds that alleviating financial frictions have differential impacts across countries, with country-specific characteristics playing a central role in determining the trade-offs between inclusion, GDP, inequality, and overall welfare. It covers the following sections in detail:

• Model used in the study with a focus on savings regime, credit regime, and occupational choice of individuals;
• Competitive equilibrium in the model, data, and calibration;
• Evaluation of policy options with a focus on reducing participation costs, relaxing collateral constraints, increasing intermediation efficiency;
• Interaction among the three financial parameters, impact on GDP and inequality, and welfare analysis;
• Summary of findings and concluding remarks.