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Informal Credit Markets and Financial Underdevelopment: Evidence from Money Demand in India

Author

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  • Pradeep Srivastava

    (Harvard University)

Abstract

Using macro search costs and trading externalities, this paper attempts to highlight the underdeveloped nature of the informal financial markets. An equilibrium is depicted, with aggregate credit demand determined, to show that the supply curve of, (potential) credit may be horizontal in the presence of these markets, analogously to Lewis' (1974) unlimited supply to labor in dual economics. An implication of the analysis is a negative impact of informal sector output on money demand in addition to the usual scale effect. This proposition is tested for the Indian economy using buffer stock and error correction models of money demand.

Suggested Citation

  • Pradeep Srivastava, 1993. "Informal Credit Markets and Financial Underdevelopment: Evidence from Money Demand in India," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 28(2), pages 141-156, July.
    • Handle: RePEc:dse:indecr:v:28:y:1993:i:2:p:141-156
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    Cited by:

    1. Patel, Urjit R. & Srivastava, Pradeep, 1996. "Macroeconomic policy and output comovement: The formal and informal sectors in India," World Development, Elsevier, vol. 24(12), pages 1915-1923, December.

    More about this item

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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