The effects of financial development in the short and long run

Although many view financial access as a means of reducing poverty or increasing growth, empirical studies have produced contradictory results. One problem is that most studies cover only a short time frame and do not consider dynamic effects. I show that introducing credit creates a boom in consumption and reduces poverty initially, but eventually reduces mean con- sumption because credit substitutes for precautionary wealth. Using new consistent consump- tion data, my empirical findings show that increased access to bank branches in rural India increased consumption initially and reduced poverty, but consumption later fell and poverty rose.