IDEAS home Printed from https://ideas.repec.org/p/boc/bocoec/741.html
   My bibliography  Save this paper

The effects of financial development in the short and long run

Author

Listed:
  • Scott Fulford

    (Boston College)

Abstract

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.

Suggested Citation

  • Scott Fulford, 2010. "The effects of financial development in the short and long run," Boston College Working Papers in Economics 741, Boston College Department of Economics, revised 31 May 2011.
  • Handle: RePEc:boc:bocoec:741
    as

    Download full text from publisher

    File URL: http://fmwww.bc.edu/EC-P/wp741.pdf
    File Function: main text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Rosenzweig, Mark R & Wolpin, Kenneth I, 1993. "Credit Market Constraints, Consumption Smoothing, and the Accumulation of Durable Production Assets in Low-Income Countries: Investment in Bullocks in India," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 223-244, April.
    2. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-1248, September.
    3. Dean Karlan & Jonathan Zinman, 2010. "Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts," Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 433-464, January.
    4. Townsend, Robert M, 1994. "Risk and Insurance in Village India," Econometrica, Econometric Society, vol. 62(3), pages 539-591, May.
    5. Gine, Xavier & Townsend, Robert M., 2004. "Evaluation of financial liberalization: a general equilibrium model with constrained occupation choice," Journal of Development Economics, Elsevier, vol. 74(2), pages 269-307, August.
    6. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-298, April.
    7. Clarida, Richard H, 1987. "Consumption, Liquidity Constraints and Asset Accumulation in the Presence of Random Income Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 339-351, June.
    8. repec:pri:rpdevs:morduch_microfinance_poor is not listed on IDEAS
    9. Oded Galor & Joseph Zeira, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 35-52.
    10. Deaton, Angus & Paxson, Christina, 1994. "Intertemporal Choice and Inequality," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 437-467, June.
    11. Mark M. Pitt & Shahidur R. Khandker, 1998. "The Impact of Group-Based Credit Programs on Poor Households in Bangladesh: Does the Gender of Participants Matter?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 958-996, October.
    12. Paul Gertler & David I. Levine & Enrico Moretti, 2009. "Do microfinance programs help families insure consumption against illness?," Health Economics, John Wiley & Sons, Ltd., vol. 18(3), pages 257-273, March.
    13. Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 717-737.
    14. Shahidur R. Khandker, 2005. "Microfinance and Poverty: Evidence Using Panel Data from Bangladesh," The World Bank Economic Review, World Bank Group, vol. 19(2), pages 263-286.
    15. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
    16. Joseph P. Kaboski & Robert M. Townsend, 2012. "The Impact of Credit on Village Economies," American Economic Journal: Applied Economics, American Economic Association, vol. 4(2), pages 98-133, April.
    17. Caballero, Ricardo J, 1991. "Earnings Uncertainty and Aggregate Wealth Accumulation," American Economic Review, American Economic Association, vol. 81(4), pages 859-871, September.
    18. Kazianga, Harounan & Udry, Christopher, 2006. "Consumption smoothing? Livestock, insurance and drought in rural Burkina Faso," Journal of Development Economics, Elsevier, vol. 79(2), pages 413-446, April.
    19. Robert M. Townsend & Mr. Kenichi Ueda, 2003. "Financial Deepening, Inequality, and Growth: A Model-Based Quantitative Evaluation," IMF Working Papers 2003/193, International Monetary Fund.
    20. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    21. Jonathan Morduch, 1998. "Does Microfinance Really Help the Poor? New Evidence from Flagship Programs in Bangladesh," Working Papers 198, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
    22. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 443-478.
    23. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934, Elsevier.
    24. Angus Deaton & Valerie Kozel, 2005. "Data and Dogma: The Great Indian Poverty Debate," The World Bank Research Observer, World Bank Group, vol. 20(2), pages 177-199.
    25. Valerie R. Bencivenga & Bruce D. Smith, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 195-209.
    26. Acemoglu, Daron & Zilibotti, Fabrizio, 1997. "Was Prometheus Unbound by Chance? Risk, Diversification, and Growth," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 709-751, August.
    27. David B. Gross & Nicholas S. Souleles, 2002. "Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 149-185.
    28. Robert M. Townsend & Kenichi Ueda, 2006. "Financial Deepening, Inequality, and Growth: A Model-Based Quantitative Evaluation -super-1," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 251-293.
    29. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2002. "Consumption Over the Life Cycle," Econometrica, Econometric Society, vol. 70(1), pages 47-89, January.
    30. Christopher D. Carroll, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 1-55.
    31. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
    32. Nicola Fuchs-Schundeln, 2008. "The Response of Household Saving to the Large Shock of German Reunification," American Economic Review, American Economic Association, vol. 98(5), pages 1798-1828, December.
    33. Hadar, Josef & Russell, William R, 1969. "Rules for Ordering Uncertain Prospects," American Economic Review, American Economic Association, vol. 59(1), pages 25-34, March.
    34. Beatriz Armendariz & Jonathan Morduch, 2007. "The Economics of Microfinance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262512017, December.
    35. Robin Burgess & Rohini Pande, 2005. "Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment," American Economic Review, American Economic Association, vol. 95(3), pages 780-795, June.
    36. Kroll, Yoram & Levy, Haim, 1982. "Stochastic Dominance: A Note," Journal of Finance, American Finance Association, vol. 37(3), pages 871-875, June.
    37. Schechtman, Jack & Escudero, Vera L. S., 1977. "Some results on "an income fluctuation problem"," Journal of Economic Theory, Elsevier, vol. 16(2), pages 151-166, December.
    38. Rabault, Guillaume, 2002. "When do borrowing constraints bind? Some new results on the income fluctuation problem," Journal of Economic Dynamics and Control, Elsevier, vol. 26(2), pages 217-245, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Scott L. Fulford, 2015. "How Important Are Banks for Development? National Banks in the United States, 1870-1900," The Review of Economics and Statistics, MIT Press, vol. 97(5), pages 921-938, December.
    2. Fulford, Scott, 2014. "Returns to Education in India," World Development, Elsevier, vol. 59(C), pages 434-450.
    3. Fulford, Scott L., 2013. "The effects of financial development in the short and long run: Theory and evidence from India," Journal of Development Economics, Elsevier, vol. 104(C), pages 56-72.
    4. Joseph P. Kaboski & Robert M. Townsend, 2012. "The Impact of Credit on Village Economies," American Economic Journal: Applied Economics, American Economic Association, vol. 4(2), pages 98-133, April.
    5. Abhijit Banerjee & Esther Duflo & Rachel Glennerster & Cynthia Kinnan, 2015. "The Miracle of Microfinance? Evidence from a Randomized Evaluation," American Economic Journal: Applied Economics, American Economic Association, vol. 7(1), pages 22-53, January.
    6. Marín Ana Georgina & Schwabe Rainer, 2013. "Bank Competition and Account Penetration: Evidence from Mexico," Working Papers 2013-14, Banco de México.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fulford, Scott L., 2013. "The effects of financial development in the short and long run: Theory and evidence from India," Journal of Development Economics, Elsevier, vol. 104(C), pages 56-72.
    2. Asli Demirgüç-Kunt & Ross Levine, 2009. "Finance and Inequality: Theory and Evidence," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 287-318, November.
    3. Joseph P. Kaboski & Robert M. Townsend, 2011. "A Structural Evaluation of a Large‐Scale Quasi‐Experimental Microfinance Initiative," Econometrica, Econometric Society, vol. 79(5), pages 1357-1406, September.
    4. Karlan, Dean & Morduch, Jonathan, 2010. "Access to Finance," Handbook of Development Economics, in: Dani Rodrik & Mark Rosenzweig (ed.), Handbook of Development Economics, edition 1, volume 5, chapter 0, pages 4703-4784, Elsevier.
    5. Scott L. Fulford, 2015. "How Important Are Banks for Development? National Banks in the United States, 1870-1900," The Review of Economics and Statistics, MIT Press, vol. 97(5), pages 921-938, December.
    6. Bertola, Giuseppe, 2000. "Macroeconomics of distribution and growth," Handbook of Income Distribution, in: A.B. Atkinson & F. Bourguignon (ed.), Handbook of Income Distribution, edition 1, volume 1, chapter 9, pages 477-540, Elsevier.
    7. D’Onofrio, Alexandra & Minetti, Raoul & Murro, Pierluigi, 2019. "Banking development, socioeconomic structure and income inequality," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 428-451.
    8. Atul MEHTA & Joysankar BHATTACHARYA, 2018. "Financial sector development and the poor in developing countries: revisiting the access to finance channel," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(616), A), pages 153-168, Autumn.
    9. Beck Thorsten & Büyükkarabacak Berrak & Rioja Felix K. & Valev Neven T., 2012. "Who Gets the Credit? And Does It Matter? Household vs. Firm Lending Across Countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-46, March.
    10. Besley, Timothy, 1995. "Savings, credit and insurance," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 3, chapter 36, pages 2123-2207, Elsevier.
    11. Islam, Asadul & Maitra, Pushkar, 2012. "Health shocks and consumption smoothing in rural households: Does microcredit have a role to play?," Journal of Development Economics, Elsevier, vol. 97(2), pages 232-243.
    12. Pierluigi Murro & Valentina Peruzzi, 2018. "Cooperative banks and income inequality: Evidence from Italian provinces," Working Papers CASMEF 1804, Dipartimento di Economia e Finanza, LUISS Guido Carli.
    13. Guangdong Xu, 2022. "From financial structure to economic growth: Theory, evidence and challenges," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 51(1), February.
    14. Vivien Kappel, 2010. "The Effects of Financial Development on Income Inequality and Poverty," CER-ETH Economics working paper series 10/127, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    15. Raoul Minetti & Pierluigi Murro & Valentina Peruzzi, 2021. "Not All Banks Are Equal: Cooperative Banking And Income Inequality," Economic Inquiry, Western Economic Association International, vol. 59(1), pages 420-440, January.
    16. Sefa K. Awaworyi, 2014. "The Impact of Microfinance Interventions: A Meta-analysis," Monash Economics Working Papers 03-14, Monash University, Department of Economics.
    17. Minetti, Raoul & Murro, Pierluigi & Peruzzi, Valentina, 2019. "One size does not fit all. Cooperative banking and income inequality," Working Papers 2019-10, Michigan State University, Department of Economics.
    18. Fulford, Scott L., 2015. "How important is variability in consumer credit limits?," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 42-63.
    19. Kim, Dong-Hyeon & Lin, Shu-Chin, 2011. "Nonlinearity in the financial developmentâincome inequality nexus," Journal of Comparative Economics, Elsevier, vol. 39(3), pages 310-325, September.
    20. Tressel, Thierry, 2003. "Dual Financial Systems and Inequalities in Economic Development," Journal of Economic Growth, Springer, vol. 8(2), pages 223-257, June.

    More about this item

    Keywords

    financial access; precaution; development; India;
    All these keywords.

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:boc:bocoec:741. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/debocus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christopher F Baum (email available below). General contact details of provider: https://edirc.repec.org/data/debocus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.