Credit Constraints, Productivity Shocks and Consumption Volatility in Emerging Economies
IMF Working Papers, May 22, 2013
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- Credit Constraints, Productivity Shocks and Consumption Volatility in Emerging Economies
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Bibliographic details
- Authors: Rudrani Bhattacharya, Ila Patnaik
- Published: May 22, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484325988.001
Summary and research question
- 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.
Model and analytical framework
- 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.
Main findings and evidence
- 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.
Publication and metadata
- 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
Source: "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.