Credit Constraints, Productivity Shocks and Consumption Volatility in Emerging Economies

May 22, 2013

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Format: Chicago

Rudrani Bhattacharya, and Ila Patnaik. Credit Constraints, Productivity Shocks and Consumption Volatility in Emerging Economies, (USA: International Monetary Fund, 2013) accessed November 23, 2024

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.

Subject: 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

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/120
Stock No:

WPIEA2013120
ISBN:

9781484325988
ISSN:

1018-5941

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