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Credit Constraints and Economic Growth in a Dual Economy

Author

Listed:
  • Peter Skott

    (University of Massachusetts - Amherst)

  • Leopoldo Gomez-Ramirez

    (Universidad del Norte, Colombia)

Abstract

Pervasive credit constraints have been seen as major sources of slow growth in developing economies. This paper clarifies a mechanism through which an inefficient financial system can reduce productivity growth. Using a two-sector model, second, we examine the implications for employment and the distribution of income. Both classical and Keynesian versions of the model are considered; saving decisions are central in the classical version while firms’ investment and pricing decisions take center stage in the Keynesian version. We find that, although boosting the asymptotic rate of growth, a relaxation of credit constraints may reduce the share of the formal sector, increase inequality and underemployment, and have little or no effect on the medium-run rate of growth.

Suggested Citation

  • Peter Skott & Leopoldo Gomez-Ramirez, 2017. "Credit Constraints and Economic Growth in a Dual Economy," UMASS Amherst Economics Working Papers 2017-13, University of Massachusetts Amherst, Department of Economics.
    • Handle: RePEc:ums:papers:2017-13
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    2. Joao Paulo A. de Souza & Leopoldo Gómez‐Ramírez, 2021. "Industrialization and skill acquisition in an evolutionary model of coordination failures," Metroeconomica, Wiley Blackwell, vol. 72(4), pages 849-867, November.
    3. Leopoldo Gómez Ramírez, 2019. "Credit Constraints and Investment in Mexico, an Empirical Test," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 14(3), pages 415-432, Julio - S.
    4. Quan Tran & Anh‐Tuan Doan & Thao Tran, 2021. "Small and medium enterprises' credit access, ownership structure and job development," Australian Economic Papers, Wiley Blackwell, vol. 60(4), pages 710-735, December.
    5. Argentiero, Amedeo & Cerqueti, Roy & Sabatini, Fabio, 2021. "Does social capital explain the Solow residual? A DSGE approach," Structural Change and Economic Dynamics, Elsevier, vol. 58(C), pages 35-53.
    6. Ariza Ruiz, Efrén Danilo & Garza, Nestor, 2024. "The unfolding of neoliberalism in economics curricula and scholarships: Colombia as a case study," ZÖSS-Discussion Papers 104, University of Hamburg, Centre for Economic and Sociological Studies (CESS/ZÖSS).
    7. Ugurlu, Esra Nur, 2023. "Sectoral implications of policy induced household credit expansions," Structural Change and Economic Dynamics, Elsevier, vol. 67(C), pages 14-31.
    8. Skott, Peter, 2021. "Fiscal policy and structural transformation in developing economies," Structural Change and Economic Dynamics, Elsevier, vol. 56(C), pages 129-140.

    More about this item

    Keywords

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    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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