The Macroeconomics of Microfinance

Date Published: 
Apr 2011
Buera, F., Kaboski, J. & Shin, Y.

Analyzing macroeconomic effects of microfinance

This paper provides a quantitative analysis of the potential impacts of economy wide microfinance availability, focusing on the general equilibrium effects of scaling up.

The paper reviews literature on the macroeconomic impact of microfinance and summarizes the major microcredit programs. It develops a baseline model of entrepreneurship and heterogeneous producers and introduces microfinance into it. It uses the model to quantify the relationship between the size of microfinance and key macroeconomic indicators of development. The paper compares the results with those of recent microevaluations in India and Thailand. It analyzes three variations of the model to gain further insights.

The results reveal that general equilibrium considerations are important for the evaluation of large scale microfinance. Findings include:

  • Redistributive impact of microfinance is stronger in general equilibrium than in partial equilibrium, but aggregate impact is smaller;
  • Microfinance reduces aggregate saving and the steady state capital stock;
  • Microfinance is strongly pro-poor in general equilibrium;
  • Microfinance has the strongest impact on marginal entrepreneurs and the poor, but may have a negative impact on the most talented entrepreneurs.
India, Thailand