Pervasive credit constraints have been seen as major sources of slow growth in developing economies. This paper clarifies a mechanism through which an inefficient financial system can reduce productivity growth. Using a two-sector model, second, we examine the implications for employment and the distribution of income. Both classical and Keynesian versions of the model are considered; saving decisions are central in the classical version while firms' investment and pricing decisions take center stage in the Keynesian version. We find that, although boosting the asymptotic rate of growth, a relaxation of credit constraints may reduce the share of the formal sector, increase inequality and underemployment, and have little or no effect on the medium-run rate of growth.

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The objective of this paper is to examine the issue of expansionary policies during the pandemic in Mexico. To do so, we use a dynamic model of the interaction between Covid-19 and economic output. We find that expansionary policies are desirable but that they alone cannot prevent the acceleration of the pandemic. We also model supplementary policies, especially public health policies, and find that in their presence expansionary economic policies can put the economy on track while simultaneously addressing the pandemic. Our analysis’s implications are straightforward: countercyclical economic policies are desirable when there are other supplementary policies. A limitation of our analysis is that it is circumscribed to the Mexican context. The paper is a novel contribution to the burgeoning literature on Covid-19 in Mexico because it is the first which formally examines the issue of expansionary policies during the pandemic. We conclude that both expansionary policies and supplementary policies are needed to achieve a sustainable recovery.

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