{
  "title": "Credit Constraints, Productivity Shocks and Consumption Volatility in Emerging Economies",
  "publication": "IMF Working Papers, May 22, 2013",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/credit-constraints-productivity-shocks-and-consumption-volatility-in-emerging-economies-40559",
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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.",
  "sections": [
    {
      "heading": "Summary and research question",
      "content": "- Research question: How does access to credit impact consumption volatility in emerging economies?\n- Key puzzle: Theory and evidence from advanced economies suggests greater household access to finance smooths consumption, but evidence from emerging markets indicates financial reform can increase consumption volatility relative to output.\n- Approach: An emerging-economy model in which households face shocks to trend growth rate and a fraction of households are credit constrained.\n- Mechanism: Unconstrained households can respond to shocks to trend growth by raising current consumption more than the rise in current income; financial reform increases the share of unconstrained households, leading to greater relative consumption volatility.\n- Empirical support: Calibration of the model for pre and post financial reform in India provides support for the model's key predictions."
    },
    {
      "heading": "Model and analytical framework",
      "content": "- Households face shocks to the trend growth rate.\n- Population split: a fraction of households are credit constrained; the remainder are unconstrained.\n- Behavioral implication: Unconstrained households smooth consumption by front-loading consumption when trend growth shocks are positive, potentially raising consumption more than current income.\n- Aggregate implication: Increasing the share of unconstrained households (via financial reform) can increase aggregate consumption volatility relative to output."
    },
    {
      "heading": "Main findings and evidence",
      "content": "- Financial reform that increases household access to credit can lead to greater relative consumption volatility in emerging markets.\n- Calibration for India (pre and post financial reform) is consistent with the model’s key predictions that greater access to credit raises consumption volatility relative to output.\n- The paper reconciles the seeming contradiction between advanced-economy experience (credit smooths consumption) and emerging-market evidence (financial reform increases consumption volatility relative to output) through the model mechanism described."
    },
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      "heading": "Publication and metadata",
      "content": "- Authors: Rudrani Bhattacharya, Ila Patnaik\n- Date: May 22, 2013\n- Series: IMF Working Papers\n- Series identifier: Working Paper No. 2013/120\n- Pages: 33\n- Volume: 2013\n- Issue: 120\n- DOI: https://doi.org/10.5089/9781484325988.001\n- Stock No: WPIEA2013120\n- ISBN: 9781484325988\n- ISSN: 1018-5941\n- Subject tags: Consumption, Financial markets, Financial sector development, Income, Income shocks, Labor, National accounts\n- Keywords: Africa; aggregate consumption; Asia and Pacific; business cycle; closed economy; Consumption; consumption cycle; consumption volatility; East Asia; Eastern Europe; emerging market business cycle stylized facts; financial development; Financial sector development; Income; Income shocks; labour productivity; Macroeconomics; real business cycles; South Asia; volatility of consumption; volatility rise; WP\n\nSource: \"Credit Constraints, Productivity Shocks and Consumption Volatility in Emerging Economies\", Rudrani Bhattacharya and Ila Patnaik, IMF Working Papers, May 22, 2013, Working Paper No. 2013/120.\n\n---\n\n Content in this bundle\n\n- wp13120\n  - wp13120 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp13120 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/credit-constraints-productivity-shocks-and-consumption-volatility-in-emerging-economies-40559"
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    "Authors: Rudrani Bhattacharya, Ila Patnaik",
    "Published: May 22, 2013",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781484325988.001",
    "Research question: How does access to credit impact consumption volatility in emerging economies?",
    "Key puzzle: Theory and evidence from advanced economies suggests greater household access to finance smooths consumption, but evidence from emerging markets indicates financial reform can increase consumption volatility relative to output.",
    "Approach: An emerging-economy model in which households face shocks to trend growth rate and a fraction of households are credit constrained.",
    "Mechanism: Unconstrained households can respond to shocks to trend growth by raising current consumption more than the rise in current income; financial reform increases the share of unconstrained households, leading to greater relative consumption volatility.",
    "Empirical support: Calibration of the model for pre and post financial reform in India provides support for the model's key predictions.",
    "Households face shocks to the trend growth rate.",
    "Population split: a fraction of households are credit constrained; the remainder are unconstrained.",
    "Behavioral implication: Unconstrained households smooth consumption by front-loading consumption when trend growth shocks are positive, potentially raising consumption more than current income.",
    "Aggregate implication: Increasing the share of unconstrained households (via financial reform) can increase aggregate consumption volatility relative to output.",
    "Financial reform that increases household access to credit can lead to greater relative consumption volatility in emerging markets.",
    "Calibration for India (pre and post financial reform) is consistent with the model’s key predictions that greater access to credit raises consumption volatility relative to output.",
    "The paper reconciles the seeming contradiction between advanced-economy experience (credit smooths consumption) and emerging-market evidence (financial reform increases consumption volatility relative to output) through the model mechanism described.",
    "Authors: Rudrani Bhattacharya, Ila Patnaik",
    "Date: May 22, 2013",
    "Series: IMF Working Papers",
    "Series identifier: Working Paper No. 2013/120",
    "Pages: 33",
    "Volume: 2013",
    "Issue: 120",
    "DOI: https://doi.org/10.5089/9781484325988.001",
    "Stock No: WPIEA2013120",
    "ISBN: 9781484325988",
    "ISSN: 1018-5941",
    "Subject tags: Consumption, Financial markets, Financial sector development, Income, Income shocks, Labor, National accounts",
    "Keywords: Africa; aggregate consumption; Asia and Pacific; business cycle; closed economy; Consumption; consumption cycle; consumption volatility; East Asia; Eastern Europe; emerging market business cycle stylized facts; financial development; Financial sector development; Income; Income shocks; labour productivity; Macroeconomics; real business cycles; South Asia; volatility of consumption; volatility rise; WP",
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