Policy Brief

Smoothing Financial Frictions for Structural Change

Savita Diggs and Joseph P. Kaboski


Financial frictions restrict the ability of markets and institutions to allocate capital efficiently. This affects both savers and borrowers, among households and firms. Through a variety of mechanisms, this ultimately leads to slower economic growth. Credit rationing limits the extent to which firms can invest and grow. Restrictive lending inhibits potential new firms overcoming high entry costs. These inefficiencies feed through to households through fewer job opportunities and higher prices. Households are also directly impacted if they are unable to borrow or save, which could constrain opportunities for self-investment. This policy brief examines the challenges in designing policy to alleviate these frictions, especially related to data availability, and the key areas where research can contribute to policy solutions.

This policy brief is based off the pathfinding paper, Financial Frictions, Financial Market Development, and Macroeconomic Development, written by Joseph P. Kaboski.

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