Credit constraints, productivity shocks and consumption volatility in emerging economies
AbstractHow 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Institute of Public Finance and Policy in its series Working Papers with number 13/121.
Date of creation: Mar 2013
Date of revision:
Note: Working Paper 121, 2013
Contact details of provider:
Web page: http://www.nipfp.org.in
Macroeconomics ; Real business cycles ; Emerging market business cycle stylized facts ; Financial development;
Find related papers by JEL classification:
- E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-04-13 (All new papers)
- NEP-DGE-2013-04-13 (Dynamic General Equilibrium)
- NEP-MAC-2013-04-13 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Heathcote, Jonathan & Perri, Fabrizio, 2002.
"Financial autarky and international business cycles,"
Journal of Monetary Economics,
Elsevier, vol. 49(3), pages 601-627, April.
- 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.
- 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.
- 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.
- Leblebicioglu, AslI, 2009.
"Financial integration, credit market imperfections and consumption smoothing,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 33(2), pages 377-393, February.
- Asli Leblebicioglu, 2006. "Financial Integration, Credit Market Imperfections and Consumption Smoothing," 2006 Meeting Papers 651, Society for Economic Dynamics.
- 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.
- Mark Aguiar & Gita Gopinath, 2004. "Emerging Market Business Cycles: The Cycle is the Trend," NBER Working Papers 10734, National Bureau of Economic Research, Inc.
- Mark Aguiar & Gita Gopinath, 2004. "Emerging market business cycles: the cycle is the trend," Working Papers 04-4, Federal Reserve Bank of Boston.
- Dani Rodrik, 2006.
"Understanding South Africa's Economic Puzzles,"
- 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.
- 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.
- 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.
- 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.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (S.Siva Chidambaram).
If references are entirely missing, you can add them using this form.