Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/195162
Authors: 
Lahcen, Mohammed Ait
Gomis-Porqueras, Pedro
Year of Publication: 
2018
Series/Report no.: 
Working Paper 310
Abstract: 
We propose a monetary dynamic general equilibrium model with endogenous credit market participation to study the impact of financial inclusion on welfare and inequality. We find that significant consumption inequality can result from limited access to basic financial services. In this environment, monetary policy has distributional consequences as agents face different liquidity constraints. This heterogeneity generates a pecuniary externality which can result in overconsumption of financially included agents above the socially efficient level. We conduct a quantitative assessment for the case of India. Our simple model is able to account for approximately a third of the observed consumption inequality. We analyze various policies aimed at increasing financial inclusion. As a result of pecuniary externalities, interest rate policies can result in a decrease in welfare and an increase in consumption inequality. Moreover, we find that a direct benefit transfer to bank account owners is superior to interest rate policies as it can increase welfare and reduce consumption inequality despite a decrease in individual consumption.
Subjects: 
money
credit
banking
financial inclusion
inequality
JEL: 
E40
E50
Document Type: 
Working Paper
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