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Credit Constraints, Productivity Shocks and Consumption Volatility in Emerging Economies

Credit Constraints, Productivity Shocks and Consumption Volatility in Emerging Economies

Ila Patnaik
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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.
Pages
33
Format
ebook
Publisher
International Monetary Fund
Release
May 22, 2013
ISBN
1484319168
ISBN 13
9781484319161

Credit Constraints, Productivity Shocks and Consumption Volatility in Emerging Economies

Ila Patnaik
0/5 ( ratings)
Read Download
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.
Pages
33
Format
ebook
Publisher
International Monetary Fund
Release
May 22, 2013
ISBN
1484319168
ISBN 13
9781484319161

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