Credit market imperfection and goods market deregulation in OLG model

Abstract

AbstractWe study the effects of financial development and product market competition on the macroeconomic dynamics in an overlapping generations model with credit market imperfections and monopolistic competition. In general, financial development is regarded as one of the key engines for economic growth. Financial market deregulation facilitates financing for entrepreneurs and has a positive effect on business growth. In fact, the effects of financial liberalization are different between developing and developed countries. We develop a model in which financial development brings about the regime shift endogenously. We show that financial liberalization at an early stage of economic development is harmful for economic growth. Instead, financial liberalization should be conducted after the take‐off of the economy. The sequence of carrying out several market deregulation policies is important. We insist that the government should deregulate the goods market before financial market liberalization.