Implementing financial sector policies that promote financial inclusion and growth is one of the key goals of developing economies. However, the outcomes are often spatially and temporally uneven. Yan Ji of HKUST and co-researchers develop an innovative model to examine the economic impacts of such policies across space and time, taking as a case study the geographical expansion of bank branches after banking deregulation in Thailand.

“As a result of a relaxation of branching requirements in the late 1980s, amid other financial reforms,” explain the researchers, “the Thai economy experienced unprecedented growth in the number of bank branches.” Ji and colleagues are the first to evaluate the impact of such bank expansion through the lens of a spatial equilibrium model disciplined by micro-evidence.

This approach represents a departure from typical calibration exercises in this field, which are based on models that do not consider geography. The researchers apply their model to Thai data for the 1986–96 period, shedding light on salient regional and aggregate patterns in occupational choice, financial access, and inequality. “Our model reveals that market size, productivity, and access to finance are three important market characteristics that explain the geographic distribution of branches in the data,” the authors tell us.

Many developing countries directly target underbanked regions through government policies to foster financial inclusion. “As a final exercise,” say the researchers, “we use the model to evaluate two such policies, illustrating their potential impacts through a change in the distribution of branches.”

Indeed, the findings of this pioneering model are not limited to Thailand. “Our objective is to provide a micro-founded macroeconomic framework to quantitatively explore the links across both space and time, which can be applied to many countries,” the researchers note. “Our model should be viewed as a step toward improving understanding of bank expansion and financial deepening across regions.”