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On the Macroeconomics of Microfinance

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  • Soyolmaa Batbekh
  • Keith Blackburn

Abstract

Microfinance (small scale lending to the poor) is integrated into a dynamic macroeconomic model of income distribution. Two-period-lived agents, belonging to overlapping generation of dynastic families, choose between three alternative occupations - subsistence production, small-scale project investment and large-scale project investment. Subsistence activity is costless and riskless, whilst project investment is the opposite and may require external funding from financial institutions with imperfect powers of contract enforcement. In the absence of microfinance, only large-scale, collateralised loans are available through the traditional banking sector. Under such circumstances, initial inequalities persist as only the wealthy are able to acquire these loans, and as the small-scale enterprise is either not feasible or not profitable. With the introduction of microfinance, this venture is made both possible and attractive through the provision of non-collateralised loans and other features of microlending arrangements. Poverty and inequality are reduced as a result.

Suggested Citation

  • Soyolmaa Batbekh & Keith Blackburn, 2008. "On the Macroeconomics of Microfinance," Centre for Growth and Business Cycle Research Discussion Paper Series 106, Economics, The University of Manchester.
    • Handle: RePEc:man:cgbcrp:106
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    File URL: http://hummedia.manchester.ac.uk/schools/soss/cgbcr/discussionpapers/dpcgbcr106.pdf
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    2. Yusupov, Nurmukhammad, 2012. "Microcredit and development in an occupational choice model," Economics Letters, Elsevier, vol. 117(3), pages 820-823.
    3. Marcella Corsi & Marina De Angelis & Pierluigi Montalbano, 2013. "The Gender Impact of Microfinance: The Case of Wekembe in Uganda," Working Papers CEB 13-045, ULB -- Universite Libre de Bruxelles.
    4. Islam, Khan & O’Gorman, Melanie, 2019. "Microcredit contract design: A macroeconomic evaluation," World Development, Elsevier, vol. 124(C), pages 1-1.
    5. Jontro Simanjuntak & Tri Ratnawati & Nekky Rahmiyati, 2017. "Economic Growth as Mediation of Regional Own Source Revenue, Investment and Asset Management on Labor Absorption and Social Welfare in Regencies/Cities in Riau Islands Province," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(8), pages 127-137, August.

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