Credit Constraints, Productivity Shocks and Consumption Volatility in Emerging Economies

Author/Editor:

Ila Patnaik ; Rudrani Bhattacharya

Publication Date:

May 22, 2013

Electronic Access:

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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

English

Publication Date:

May 22, 2013

ISBN/ISSN:

9781484325988/1018-5941

Stock No:

WPIEA2013120

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

33

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