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The effects of financial development in the short and long run

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  • Scott Fulford

    ()
    (Boston College)

Abstract

Although many view financial access as a means of reducing poverty or increasing growth, empirical studies have produced contradictory results. One problem is that most studies cover only a short time frame and do not consider dynamic effects. I show that introducing credit creates a boom in consumption and reduces poverty initially, but eventually reduces mean con- sumption because credit substitutes for precautionary wealth. Using new consistent consump- tion data, my empirical findings show that increased access to bank branches in rural India increased consumption initially and reduced poverty, but consumption later fell and poverty rose.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 741.

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Date of creation: 15 Jun 2010
Date of revision: 31 May 2011
Handle: RePEc:boc:bocoec:741

Note: Previously circulated as "Financial access, precaution, and development: Theory and evidence from India"
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Keywords: financial access; precaution; development; India;

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References

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  1. Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2000. "Consumption Over the Life-Cycle," CEPR Discussion Papers 2345, C.E.P.R. Discussion Papers.
  2. Dean Karlan & Jonathan Zinman, 2006. "Expanding credit access: Using randomized supply decisions to estimate the impacts," Natural Field Experiments 00281, The Field Experiments Website.
  3. David B. Gross & Nicholas S. Souleles, 2001. "Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data," NBER Working Papers 8314, National Bureau of Economic Research, Inc.
  4. Robert M. Townsend & Kenichi Ueda, 2003. "Financial Deepening, Inequality, and Growth," IMF Working Papers 03/193, International Monetary Fund.
  5. Robert M. Townsend, . "Risk and Insurance in Village India," University of Chicago - Population Research Center 91-3a, Chicago - Population Research Center.
  6. Oded Galor & Joseph Zeira, 2013. "Income Distribution and Macroeconomics," Working Papers 2013-12, Brown University, Department of Economics.
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  8. Robin Burgess & Rohini Pande, 2004. "Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment," The Centre for Market and Public Organisation 04/104, Department of Economics, University of Bristol, UK.
  9. Beatriz Armendariz & Jonathan Morduch, 2007. "The Economics of Microfinance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262512017, December.
  10. Harounan Kazianga & Christopher Udry, 2004. "Consumption Smoothing? Livestock, Insurance and Drought in Rural Burkina Faso," Working Papers 898, Economic Growth Center, Yale University.
  11. Paul Gertler & David I. Levine & Enrico Moretti, 2003. "Do Microfinance Programs Help Families Insure Consumption Against Illness?," Development and Comp Systems 0303004, EconWPA.
  12. Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 195-209, April.
  14. Gine, Xavier & Townsend, Robert M., 2004. "Evaluation of financial liberalization: a general equilibrium model with constrained occupation choice," Journal of Development Economics, Elsevier, vol. 74(2), pages 269-307, August.
  15. Shahidur R. Khandker, 2005. "Microfinance and Poverty: Evidence Using Panel Data from Bangladesh," World Bank Economic Review, World Bank Group, vol. 19(2), pages 263-286.
  16. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934 Elsevier.
  17. Christopher D. Carroll, 1996. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," NBER Working Papers 5788, National Bureau of Economic Research, Inc.
  18. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
  19. Joseph P. Kaboski & Robert M. Townsend, 2012. "The Impact of Credit on Village Economies," American Economic Journal: Applied Economics, American Economic Association, vol. 4(2), pages 98-133, April.
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Cited by:
  1. Esther Duflo & Abhijit Banerjee & Rachel Glennerster & Cynthia G. Kinnan, 2013. "The Miracle of Microfinance? Evidence from a Randomized Evaluation," NBER Working Papers 18950, National Bureau of Economic Research, Inc.
  2. Fulford, Scott L., 2013. "The effects of financial development in the short and long run: Theory and evidence from India," Journal of Development Economics, Elsevier, vol. 104(C), pages 56-72.
  3. Scott Fulford, 2010. "If financial development matters, then how? National banks in the United States 1870-1900," Boston College Working Papers in Economics 753, Boston College Department of Economics, revised 15 May 2012.
  4. Joseph P. Kaboski & Robert M. Townsend, 2012. "The Impact of Credit on Village Economies," American Economic Journal: Applied Economics, American Economic Association, vol. 4(2), pages 98-133, April.
  5. Scott Fulford, 2012. "Returns to education in India," Boston College Working Papers in Economics 819, Boston College Department of Economics.

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