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Credit Constraints, Productivity Shocks and Consumption Volatility in Emerging Economies

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Author Info

  • Rudrani Bhattacharya
  • Ila Patnaik

Abstract

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/120.

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Length: 33
Date of creation: 22 May 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/120

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Related research

Keywords: Credit; Emerging markets; India; Productivity; Consumption; External shocks; Household credit; Access to capital markets; Economic models; Macroeconomics; real business cycles; emerging market business cycle stylized facts; financial development.; consumption volatility; total consumption; growth rate; permanent income; consumption relative; current income; current consumption; real gdp; total factor productivity; consumption expenditure; consumption volatilities; business cycle volatilities; income inequality; capital account; consumption cycle; private consumption; disposable income; consumption smoothing; gross fixed capital formation; business cycle correlation; permanent income hypothesis; labour income; aggregate consumption; private consumption expenditure;

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References

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  1. Aguiar, Mark & Gopinath, Gita, 2007. "Emerging Market Business Cycles: The Cycle is the Trend," Scholarly Articles 11988098, Harvard University Department of Economics.
  2. Aghion, Philippe & Angeletos, George-Marios & Banerjee, Abhijit & Manova, Kalina, 2010. "Volatility and growth: Credit constraints and the composition of investment," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 246-265, April.
  3. Dani Rodrik, 2006. "Understanding South Africa's Economic Puzzles," NBER Working Papers 12565, National Bureau of Economic Research, Inc.
  4. Heathcote, Jonathan & Perri, Fabrizio, 1999. "Financial Autarky and International Business Cycles," Working Paper Series in Economics and Finance 320, Stockholm School of Economics, revised 30 Apr 2000.
  5. Buch, Claudia M. & Doepke, Joerg & Pierdzioch, Christian, 2005. "Financial openness and business cycle volatility," Journal of International Money and Finance, Elsevier, vol. 24(5), pages 744-765, September.
  6. Asli Leblebicioglu, 2006. "Financial Integration, Credit Market Imperfections and Consumption Smoothing," 2006 Meeting Papers 651, Society for Economic Dynamics.
  7. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, vol. 115, pages 69-102.
  8. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  9. Harun Alp & Yusuf Soner Baskaya & Mustafa Kilinc & Canan Yuksel, 2012. "Stylized Facts for Business Cycles in Turkey," Working Papers 1202, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  10. Hayashi, Fumio, 1982. "The Permanent Income Hypothesis: Estimation and Testing by Instrumental Variables," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 895-916, October.
  11. Anders Aslund, 2012. "Lessons from Reforms in Central and Eastern Europe in the Wake of the Global Financial Crisis," Working Paper Series WP12-7, Peterson Institute for International Economics.
  12. Aghion, Philippe & Angeletos, George-Marios & Banerjee, Abhijit & Manova, Kalina, 2010. "Volatility and growth: Credit constraints and the composition of investment," Scholarly Articles 12490636, Harvard University Department of Economics.
  13. Ang, James B., 2011. "Finance and consumption volatility: Evidence from India," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 947-964, October.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Credit Constraints, Productivity Shocks and Consumption Volatility in Emerging Economies
    by Christian Zimmermann in NEP-DGE blog on 2013-09-30 03:06:03

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