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Prepared by Era Dabla-Norris, Sonali Jain-Chandra, D. Filiz Unsal and Eva Van Leemput.
These examples are illustrative, as the calibration for the financial inclusion process is chosen arbitrarily. It may well be possible to increase λ beyond 3 in a shorter period of time compared to that necessary to achieve other changes, with greater positive effects on the Gini coefficient. Moreover, as many reforms are implemented on various fronts contemporaneously they are likely to affect the frictions in unison with additive effects.
A value of 3 for λ represents the level of collateral as percent of loan observed on average in advanced economies
A relaxation of borrowing constraints benefits talented entrepreneurs more as it is profitable for them to operate at a larger scale than untalented entrepreneurs. With higher λ, all entrepreneurs borrow more, but, on average, untalented ones do not borrow as much.
Using past policy changes to PSL in 2000, a number of papers (Banerjee and Duflo (2014), and Kapoor, Ranjan, Raychaudhuri (2012)) estimate that the impact of PSL on credit is about 20 percent. The impact of PSL on lending costs or access are estimated to be negligible, therefore we focus here on collateral constraints.