Growth or equality ? Losers and gainers from financial reform
We explore the consequences of liberalized credit markets for growth and inequality in a lifecycle economy with physical and human capital accumulation, populated by households of different abilities, and calibrated to match the long-run economic performance of a panel of emerging countries. Relatively modest improvements in extending credit to the ablest households appear to have large economic consequences : upfront costs (slower initial growth, higher income inequality) followed by delayed benefits (faster long-run growth). Reform also lowers lifecycle utility for substantial majority of currently active households. Premature liberalization in the least developed countries (low TFP or capital intensity) may redirect economic growth towards a poverty trap.
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