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The real cost of credit constraints: Evidence from micro-finance

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  • Renuka Sane

    ()
    (Indira Gandhi Institute of Development Research)

  • Susan Thomas

    ()
    (Indira Gandhi Institute of Development Research)

Abstract

In December 2010, the Indian state of Andhra Pradesh passed a law that severely restricted the operations of micro-finance institutions and brought the micro-finance industry to an abrupt halt. We measure the impact of micro-credit withdrawal in this unique natural experiment and find that average household expenditure dropped by 19 percent relative to a control group after the ban. The largest decrease was observed in expenditure on food. There is some evidence of higher volatility in consumption after the ban. All households were affected and not just the borrower households, which may suggest general equilibrium effects.

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Bibliographic Info

Paper provided by Indira Gandhi Institute of Development Research, Mumbai, India in its series Indira Gandhi Institute of Development Research, Mumbai Working Papers with number 2013-013.

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Length: 42 pages
Date of creation: Jul 2013
Date of revision:
Handle: RePEc:ind:igiwpp:2013-013

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Keywords: Consumption smoothing; credit; household finance; micro-finance ban; natural experiment;

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  1. Morse, Adair, 2011. "Payday lenders: Heroes or villains?," Journal of Financial Economics, Elsevier, Elsevier, vol. 102(1), pages 28-44, October.
  2. Brian T. Melzer, 2011. "The Real Costs of Credit Access: Evidence from the Payday Lending Market," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 517-555.
  3. Jeffrey Smith & Petra Todd, 2003. "Does Matching Overcome Lalonde's Critique of Nonexperimental Estimators?," University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers, University of Western Ontario, CIBC Centre for Human Capital and Productivity 20035, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
  4. Francisco J. Buera & Joseph P. Kaboski & Yongseok Shin, 2013. "The macroeconomics of microfinance," Working Papers, Federal Reserve Bank of St. Louis 2013-034, Federal Reserve Bank of St. Louis.
  5. S�ren Leth-Petersen, 2010. "Intertemporal Consumption and Credit Constraints: Does Total Expenditure Respond to an Exogenous Shock to Credit?," American Economic Review, American Economic Association, American Economic Association, vol. 100(3), pages 1080-1103, June.
  6. Donald P. Morgan & Michael R. Strain, 2007. "Payday holiday: how households fare after payday credit bans," Staff Reports, Federal Reserve Bank of New York 309, Federal Reserve Bank of New York.
  7. Gauti B. Eggertsson & Paul Krugman, 2012. "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 127(3), pages 1469-1513.
  8. Richard Blundell & Monica Costa Dias, 2000. "Evaluation methods for non-experimental data," Fiscal Studies, Institute for Fiscal Studies, Institute for Fiscal Studies, vol. 21(4), pages 427-468, January.
  9. Yongseok Shin & Joseph P. Kaboski & Francisco J. Buera, 2011. "Macroeconomics of Microfinance," 2011 Meeting Papers, Society for Economic Dynamics 545, Society for Economic Dynamics.
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