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Business cycle implications of rising household credit market participation in emerging countries

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  • Barrail, Zulma

Abstract

A small open emerging-economy model is extended with a household sector financial constraint to investigate business cycle implications of a rise in household access and use of financial services. Estimating the model on Mexican data and consistent with empirical findings, this paper finds that a rise in household credit market participation: (1) yields larger aggregate consumption volatility and (2) amplifies the effects of shocks in the domestic economy, particularly those transmitted through the interest rate channel. The estimated model also highlights that: (3) the lesser financial frictions are, the lower is the increase of consumption growth and trade balance volatility driven by a rise in household credit market participation and (4) trend productivity shocks become a more relevant source of business cycle fluctuations. Finally, standard measures of predictive accuracy suggest that the extended model outperforms the baseline emerging market model.

Suggested Citation

  • Barrail, Zulma, 2020. "Business cycle implications of rising household credit market participation in emerging countries," Journal of Economic Dynamics and Control, Elsevier, vol. 116(C).
  • Handle: RePEc:eee:dyncon:v:116:y:2020:i:c:s0165188920300853
    DOI: 10.1016/j.jedc.2020.103917
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    1. Kumar, Abhishek & Mallick, Sushanta & Sinha, Apra, 2021. "Policy errors and business cycle fluctuations: Evidence from an emerging economy," Journal of Economic Behavior & Organization, Elsevier, vol. 192(C), pages 176-198.

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    More about this item

    Keywords

    Limited asset markets participation; Rule-of-thumb consumers; Aggregate fluctuations; RBC model; Small open economy; Emerging markets;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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