Financial inclusion, entrepreneurs’ credit risk exposure and social planner financial policy

In this paper, we first show the importance of financial inclusion for poor households for the economy. We also study the impact of the social planner financial policy that helps offset entrepreneurs’ credit risk exposure and guarantee greater inclusion. We estimate one-country GIMF-DSGE model with financial accelerator based on Ivory Coast’s economy, which is a developing country where financial inclusion for households and businesses still remains a major challenge for policy makers. First, in response to monetary, technology and investment demand shocks, poor households’ consumption rises. This results in an increase in total consumption and output. Further, the quantitative magnitudes of these aggregates are higher when poor households have access to credit. Second, while the planner policy is zero in normal times, it rises during the financial crisis. Further, the macroprudential policy works to reduce the external finance premium. As a result, bank credit and investment increase. Without monitoring, entrepreneurs are subject to risk, whereas introducing the regulation mitigates their credit risk exposure, as leverage declines. Lastly, regulation usefully complements monetary policy and is realized to be welfare improving.