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THE EFFECTS OF HIGH BANKING SPREADS IN AN INFORMAL ECONOMY

  • Giovanni T. Merlin (a1) and Vladimir K. Teles (a1)

Abstract

We investigate the aggregate and distributional effects of banking spreads in an economy with informality. We build a heterogeneous agents model with incomplete markets, credit frictions, and a rich occupational choice setting, in which informality is an option for both employers and workers. The main finding is that reductions in spreads for formal firms increase wages, output, and welfare but have a deleterious impact on unemployment and inequality. Dropping spreads for informal firms lead to reduction in inequality indicators at the expense of consumption and welfare. By calibrating the model for Brazil, we also find that a hypothetical extinction of the informal sector can be harmful for poor agents, but combined with a spread reduction, it can generate strong positive effects on output and welfare.

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Corresponding author

Address correspondence to: Giovanni T. Merlin, Dorfstrasse 9, 8800, Thalwil, Switzerland. e-mail: giovanni.merlin@fgv.br. Phone: +41 766 691 941

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We thank Bernardo Guimaraes, David Turchick, Luis Araujo, the two anonymous referees, and the seminar participants at the Sao Paulo School of Economics and 36th Brazilian Econometric Society Meeting for their valuable comments. Giovanni Merlin also gratefully acknowledges the financial support from CNPq.

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References

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