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Informal Sector and Economic Growth: The Credit Supply Channel

Source:
Economic Inquiry, Vol. 54, Issue 2, pp. 1046-1067
Year:
2016
Authors:
Baptiste Massenot,
Stéphane Straub
Reseach Area:
Macro Finance
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.

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