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Financial liberalization, market structure and credit penetration

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  • Felipe Balmaceda

    ()
    (Facultad de Economía y Empresa, Universidad Diego Portales)

  • Ronald Fischer

    ()
    (Departamento de Ingenieria Industrial, Universidad de Chile)

  • Felipe Ramirez

    (Departamento de Ingenieria Industrial, Universidad de Chile)

Abstract

This paper shows that the e ects of financial liberalization on the credit market of a small and capital constrained economy depend on the market structure of domestic banks prior to liberalization. Specifically, under perfect competition in the domestic credit market prior to liberalization, liberalization leads to lower domestic interest rates, in turn leading to increased credit penetration. However, when the initial market structure is one of imperfect competition, liberalization can lead to the exclusion of less wealthy entrepreneurs from the credit market. This provides a rationale for the mixed empirical evidence concerning the e ects of liberalization on access to credit in developing markets. Moreover, the analysis provides new insights into the consequences of foreign lenders’ entry into developing economies.

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Bibliographic Info

Paper provided by Facultad de Economía y Empresa, Universidad Diego Portales in its series Working Papers with number 41.

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Date of creation: Jul 2013
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Handle: RePEc:ptl:wpaper:41

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Cited by:
  1. Ronald Fischer & Patricio Valenzuela, 2013. "Financial Openness, Market Structure and Private Credit: An Empirical Investigation," Documentos de Trabajo 297, Centro de Economía Aplicada, Universidad de Chile.

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