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The role of credit in post-stabilization consumption booms

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  • Martina Copelman
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    Abstract

    This paper presents an empirical investigation of the role of credit in the post-stabilization consumption booms of Mexico, Chile, and Israel. Credit from the banking sector to the private sector expanded very rapidly following the stabilizations. I show that this increase in credit reduced the proportion of consumers that were liquidity constrained in the economy. This reduction in liquidity constraints could have helped to fuel the observed consumption booms. In addition, I show that the most important channels for the expansion in credit to consumers in Mexico are the rapid remonetization of the economy, the fall in the ratio of debt held by banks to GDP held by banks, and the increase in the foreign liabilities of banks. For Chile, the most important channel is the remonetization of the economy, whereas in Israel, it is the crowding in effect from the fall in the ratio of public debt held by banks to GDP. The fact that only the crowding in effect was important for Israel, is explained by the differences between its banking system and those of the other countries.

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    File URL: http://www.federalreserve.gov/pubs/ifdp/1996/569/default.htm
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    File URL: http://www.federalreserve.gov/pubs/ifdp/1996/569/ifdp569.pdf
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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 569.

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    Date of creation: 1996
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    Handle: RePEc:fip:fedgif:569

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    Keywords: Chile ; Credit ; Israel ; Mexico;

    References

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    1. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
    2. Thomas J. Sargent, 1981. "The ends of four big inflations," Working Papers 158, Federal Reserve Bank of Minneapolis.
    3. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
    4. Edwards, Sebastian & Edwards, Alejandra Cox, 1991. "Monetarism and Liberalization," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226184890, March.
    5. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
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    Cited by:
    1. Gabriel Cuadra & Juan M. Sanchez & Horacio Sapriza, 2009. "Fiscal policy and default risk in emerging markets," Working Paper 09-01, Federal Reserve Bank of Richmond.
    2. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 1999. "Capital Markets and the Instability of Open Economies," CEPR Discussion Papers 2083, C.E.P.R. Discussion Papers.
    3. Werner, Alejandro M., 1999. "Building consensus for stabilizations," Journal of Development Economics, Elsevier, vol. 59(2), pages 319-336, August.

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