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Structural Change Ramifications of Consumer Credit Expansion in a Two Sector Growth Model

Author

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  • Esra Nur Ugurlu

    (Department of Economics, University of Massachusetts Amherst)

Abstract
This paper analyzes the structural change implications of consumer credit expansions in a dual-sector open economy growth model. Policy-induced increases in banks’ willingness and ability to lend result in new consumer lending, boosting consumption demand and average wages in the nontradable sector. Under the assumptions of fixed relative wages and mark-up pricing, wage pressures translate into inflationary pressures. The central bank, acting under the sole target of controlling inflation, raises the interest rate to contain inflationary pressures. This intervention causes a real exchange rate appreciation, followed by a loss of international competitiveness in the tradable sector. This way, the model illustrates that consumer credit expansions can trigger premature deindustrialization, shifting sectoral structure in favor of the nontradable sector. The formal model is inspired by the Turkish economy that experienced a notable expansion of consumer credit between 2002-2013.

Suggested Citation

  • Esra Nur Ugurlu, 2021. "Structural Change Ramifications of Consumer Credit Expansion in a Two Sector Growth Model," UMASS Amherst Economics Working Papers 2021-14, University of Massachusetts Amherst, Department of Economics.
    • Handle: RePEc:ums:papers:2021-14
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    File URL: https://scholarworks.umass.edu/econ_workingpaper/311/
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    More about this item

    Keywords

    Consumer credit; structural change; economic growth; inflation targeting; real exchange rate;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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