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Endogenous Capital Market Imperfection, Informal Interest Rate Determination and International Factor mobility in a General Equilibrium Model

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  • Chaudhuri, Sarbajit
  • Gupta, Manash Ranjan

Abstract

This paper makes a pioneering attempt to provide a theory of determination of interest rate in the informal credit market in a less developed economy in terms of a three-sector static deterministic general equilibrium model. There are two informal sectors which obtain production loans from a monopolistic moneylender and employ labour from the informal labour market. On the other hand, the formal sector employs labour at an institutionally fixed wage rate and takes loans from the competitive formal credit market. We show that an inflow of foreign capital and/or an emigration of labour raises (lowers) the informal (formal) interest rate but lowers the competitive wage rate in the informal labour market when the informal manufacturing sector is more capital-intensive vis-à-vis the informal agricultural sector. International factor mobility, therefore, raises the degrees of distortions in both the factor markets in this case.

Suggested Citation

  • Chaudhuri, Sarbajit & Gupta, Manash Ranjan, 2013. "Endogenous Capital Market Imperfection, Informal Interest Rate Determination and International Factor mobility in a General Equilibrium Model," MPRA Paper 51157, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:51157
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    References listed on IDEAS

    as
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    27. Sarbajit Chaudhuri, 2001. "Interaction of formal and informal credit markets in Backward Agriculture: A theoretical Analysis," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 36(2), pages 411-428, July.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Pioneers of the static interest rate
      by Economic Logician in Economic Logic on 2013-11-26 21:14:00

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    Cited by:

    1. Moumita Basu & Ranjanendra Narayan Nag, 2018. "Dualism, exchange rate, and employment: a structuralist model," Indian Economic Review, Springer, vol. 53(1), pages 287-310, December.

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    More about this item

    Keywords

    Informal credit; formal credit; moneylender; foreign capital; emigration; general equilibrium;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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