Models

Attempting to model the effects of microcredit is not easy task. It involves first acknowledging that the impoverished communities that microcredit targets are stuck in a "bad" equilibrium. Unless there is intervention in the market, the economy will be stuck in a perpetual state of poverty. However, with a little help from an outside force, the economy can bump up to a sustainable "good" equilibrium. Thus, the model has multiple equilibria that need to be taken into account.

Now, using the standard Keynesian cross model and the multiple equilibria demand curve, we can model the effects of microcredit.

Currently, the economy is stuck in a bad equilibrium. However, as the model shows, an increase in income will dramatically increase spending. See below graph.

Note that this equilibrium is sustainable.

Note also that this is a long run model. In the short term, defined as the length of time that microcredit is acting as a stimulator, E undergoes an autonomous shift. However, once the economy is able to sufficiently sustain itself, microcredit can stop loaning money which will allow for the model to shift back to the 45 degree line but will now, as shown, be operating at a sustainable "good" equilibrium.

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Historical Precedent | Models | Critiques of Microcredit | Benefits of Microcredit | Success Stories | Microcredit Summit Campaign | Conclusion | For More Information