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Informal Sector and Economic Development: the Credit Supply Channel

Year: 2015

Type: article

Abstract: The standard view suggests that removing barriers to entry and improving judicial enforcement reduces informality and boosts investment and growth. However, a general equilibrium approach shows that this conclusion may hold to a lesser extent in countries with a constrained supply of funds because of, for example, a more concentrated banking sector or lower financial openness. When the formal sector grows larger in those countries, more entrepreneurs become creditworthy, but the higher pressure on the credit market limits further capital accumulation. We show empirical evidence consistent with these predictions. (JELO16, O43, E26)

Source: Economic Inquiry

DOI: 10.1111/ecin.12301

Authors: Baptiste Massenot, Stéphane Straub

Institutions: Goethe University Frankfurt, Institut d'Économie Industrielle, Toulouse School of Economics

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDGs: Decent work and economic growth, Peace, justice, and strong institutions, Industry, innovation and infrastructure

Open Access status: green

Funder: Hessisches Ministerium für Wissenschaft und Kunst