International factor mobility, informal interest rate and capital market imperfection: a general equilibrium analysis

Chaudhuri, Sarbajit and Gupta, Manash Ranjan (2011): International factor mobility, informal interest rate and capital market imperfection: a general equilibrium analysis.

Abstract

This paper makes a pioneering attempt to provide a theory of determination of interest rate in the informal credit market in a small open economy in terms of a three-sector 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 while lowers the competitive wage rate in the informal labour market when the informal manufacturing sector is more capital-intensive vis-à-vis the agricultural informal sector. International factor mobility, therefore, increases the degrees of distortions in both the factor markets in this case.

• Item Type: MPRA Paper
• Language: English
• Keywords: Informal credit, formal credit, moneylender, foreign capital, emigration, general equilibrium
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F22 - International Migration; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements; F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D42 - Monopoly

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