Credit Constraints, Productivity Shocks and Consumption Volatility in Emerging Economies

Author/Editor: Rudrani Bhattacharya ; Ila Patnaik
Publication Date: May 22, 2013
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: How does access to credit impact consumption volatility? Theory and evidence from advanced economies suggests that greater household access to finance smooths consumption. Evidence from emerging markets, where consumption is usually more volatile than income, indicates that financial reform further increases the volatility of consumption relative to output. We address this puzzle in the framework of an emerging economy model in which households face shocks to trend growth rate, and a fraction of them are credit constrained. Unconstrained households can respond to shocks to trend growth by raising current consumption more than rise in current income. Financial reform increases the share of such households, leading to greater relative consumption volatility. Calibration of the model for pre and post financial reform in India provides support for the model's key predictions.
Series: Working Paper No. 13/120
Subject(s): Credit | Emerging markets | India | Productivity | Consumption | External shocks | Household credit | Access to capital markets | Economic models

Publication Date: May 22, 2013
ISBN/ISSN: 9781484325988/1018-5941 Format: Paper
Stock No: WPIEA2013120 Pages: 33
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