Filiz Unsal

A Quantitative Assessment of Financial Conditions in Asia

We propose a new Financial Condition Index (FCI) for Asian economies based on two different methodologies: a VAR model and a Dynamic Factor Model. The paper shows that this index has predictive power in forecasting GDP growth and may be thus used as a leading indicator. Based on the FCI, financial conditions in Asia tightened substantially earlier in the global crisis, reflecting losses in the stock markets and tighter credit conditions. In early 2010, financial conditions in Asia recovered rapidly and reached precrisis levels, thanks to accommodative monetary policies and a rapid rebound in regional equity markets.

Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality: A Structural Framework for Policy

We develop a micro-founded general equilibrium model with heterogeneous agents to identify pertinent constraints to financial inclusion. We evaluate quantitatively the policy impacts of relaxing each of these constraints separately, and in combination, on GDP and inequality. We focus on three dimensions of financial inclusion: access (determined by the size of participation costs), depth (determined by the size of collateral constraints resulting from limited commitment), and intermediation efficiency (determined by the size of interest rate spreads and default possibilities due to costly monitoring). We take the model to a firm-level data from the World Bank Enterprise Survey for six countries at varying degrees of economic development—three low-income countries (Uganda, Kenya, Mozambique), and three emerging market countries (Malaysia, the Philippines, and Egypt). The results suggest that alleviating different financial frictions have a differential impact across countries, with country-specific characteristics playing a central role in determining the linkages and tradeoffs between inclusion, GDP, inequality, and the distribution of gains and losses.

Financial Inclusion: Zooming in on Latin America

Countries in Latin America and the Caribbean (LAC) have made important strides in promoting financial inclusion of firms and households. However, while the region is broadly at par with its peers on financial inclusion of firms, household inclusion lags behind. Nonetheless, there is substantial heterogeneity across LAC countries. Reducing borrowing costs and strengthening further the regulatory environment, while taking steps to protect efficiency and stability of the financial system, could help close financial inclusion gaps. Reducing financial participation and monitoring costs and relaxing collateral constraints will help spur growth and reduce inequality though trade-offs are likely, as illustrated in the case of Guatemala, El Salvador, and Peru.

Macroprudential Policy, Incomplete Information and Inequality; The case of Low-Income and Developing Countries

In this paper, we use a DSGE model to study the passive and time-varying implementation of macroprudential policy when policymakers have noisy and lagged data, as commonly observed in lowincome and developing countries (LIDCs). The model features an economy with two agents; households and entrepreneurs. Entrepreneurs are the borrowers in this economy and need capital as collateral to obtain loans. The macroprudential regulator uses the collateral requirement as the policy instrument. In this set-up, we compare policy performances of permanently increasing the collateral requirement (passive policy) versus a time-varying (active) policy which responds to credit developments. Results show that with perfect and timely information, an active approach is welfare superior, since it is more effective in providing financial stability with no long-run output cost. If the policymaker is not able to observe the economic conditions perfectly or observe with a lag, a cautious (less aggressive) policy or even a passive approach may be preferred. However, the latter comes at the expense of increasing inequality and a long-run output cost. The results therefore point to the need for a more careful consideration toward the passive policy, which is usually advocated for LIDCs.

Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality

We develop a micro-founded general equilibrium model with heterogeneous agents to identify pertinent constraints to financial inclusion. We evaluate quantitatively the policy impacts of relaxing each of these constraints separately, and in combination, on GDP and inequality. We focus on three dimensions of financial inclusion: access (determined by the size of participation costs), depth (determined by the size of collateral constraints resulting from limited commitment), and intermediation efficiency (determined by the size of interest rate spreads and default possibilities due to costly monitoring). We take the model to a firm-level data from the World Bank Enterprise Survey for six countries at varying degrees of economic development—three low-income countries (Uganda, Kenya, Mozambique), and three emerging market countries (Malaysia, the Philippines, and Egypt). The results suggest that alleviating different financial frictions have a differential impact across countries, with country-specific characteristics playing a central role in determining the linkages and tradeoffs between inclusion, GDP, inequality, and the distribution of gains and losses. JEL Classification Numbers: E23, E44, E69, O11, O16, O57.