1. Sectoral implications of policy induced household credit expansions.
- Author
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Ugurlu, Esra Nur
- Subjects
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PRICE inflation , *BANKING industry , *FREE trade , *INFLATION targeting , *HOUSEHOLDS , *CONSUMER credit , *AGGREGATE demand , *CENTRAL banking industry - Abstract
• In recent years many developing countries pursued policies aimed at increasing the banking sector's ability and willingness to lend to households. • These policies contributed to relaxing borrowing constraints households were previously subjected to. • This paper presents a two-sector open economy model that examines the sectoral implications of policy driven household lending expansions. • I use macroeconomic data from the Turkish economy to motivate the model. • The paper shows that policy driven expansions in household lending can have adverse sectoral implications by benefiting low productivity nontradable industries at the expense of higher productivity tradable industries. This paper analyses the sectoral implications of household credit expansions in a two-sector open economy model. In the model, policy-induced expansion in banks' willingness and ability to lend to households results in new lending, boosting aggregate demand and average wages in the nontradable sector. Under fixed relative wages and mark-up pricing in the tradable sector, wage pressures translate into inflationary pressures. The inflation-targeting central bank increases the policy rate to contain inflationary pressures. This intervention causes a real exchange rate appreciation, followed by a reduction in international competitiveness and a contraction of the tradable sector output. This way, the model illustrates that consumer credit expansions can trigger premature deindustrialisation , shifting the sectoral structure away from the high-productivity tradable sector towards the lower-productivity nontradable sector. Key macroeconomic developments from the Turkish economy between 2002 and 2013 are presented to motivate the model. [ABSTRACT FROM AUTHOR]
- Published
- 2023
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