THE EFFECT OF FINANCIAL POLICY REFORM ON POVERTY REDUCTION

The paper estimates the effects of financial policy reform through the effect of loans on household expenditure as proxy for poverty by taking the endogeneity of loans into account. While many previous studies have attempted to estimate such effects based on a restrictive distributional assumption, this study applies a unique identification strategy to resolve the problem of endogeneity by applying 2SLS. In this identification strategy, the study uses LECS data collected before and after the policy change, and uses a unique instrument of the policy reform on state-owned commercial bank. The results show that financial policy reform leads to increase in amount of loans; and such amount of loans has positive effects on household expenditure. This evidence suggests that reforming the financial policy on state-owned commercial bank may have positive effects on household expenditure that may reduce poverty among the households.