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Credit constraints, productivity shocks and consumption volatility in emerging economies

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  • Bhattacharya, Rudrani

    ()
    (National Institute of Public Finance and Policy)

  • Patnaik, Ila

    ()
    (National Institute of Public Finance and Policy)

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    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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    File URL: http://www.nipfp.org.in/newweb/sites/default/files/WP_2013_121.pdf
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    Bibliographic Info

    Paper provided by National Institute of Public Finance and Policy in its series Working Papers with number 13/121.

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    Length: 32
    Date of creation: Mar 2013
    Date of revision:
    Handle: RePEc:npf:wpaper:13/121

    Note: Working Paper 121, 2013
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    Web page: http://www.nipfp.org.in

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    Keywords: Macroeconomics ; Real business cycles ; Emerging market business cycle stylized facts ; Financial development;

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    9. 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.
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    11. 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.
    12. 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.
    13. 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.
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