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Measuring the Equilibrium Impacts of Credit: Evidence from the Indian Microfinance Crisis

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  • Emily Breza
  • Cynthia Kinnan

Abstract

In October 2010, the state government of Andhra Pradesh, India issued an emergency ordinance, bringing microfinance activities in the state to a complete halt and causing a nation-wide shock to the liquidity of lenders, especially those with loans in the affected state. The paper used the massive dislocation in the microfinance market to identify the causal impacts of a reduction in credit supply on consumption, earnings, and employment in general equilibrium. Using a proprietary, hand-collected district-level data set from 25 separate, for-profit microlenders matched with household data from the National Sample Survey, It was found that district-level reductions in credit supply are associated with significant decreases in casual daily wages, household wage earnings and consumption. It was also found that wages in the non-tradable sector fall more than in the tradable sector (agriculture), suggesting that one important impact of the microfinance contraction was transmitted through its effect on aggregate demand. The paper presents a simple two period, two-sector model of the rural economy illustrating this channel and show that our wage results are consistent with a simple calibration of the model.

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  • Emily Breza & Cynthia Kinnan, 2018. "Measuring the Equilibrium Impacts of Credit: Evidence from the Indian Microfinance Crisis," Working Papers id:12587, eSocialSciences.
  • Handle: RePEc:ess:wpaper:id:12587
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    More about this item

    Keywords

    eSS; state government; emergency ordinance; microfinance activities; liquidity of lenders; loans; massive dislocation; microfinance market; casual impacts; credit supply; consumption; earning; employment; micro-lenders; district-level reductions; casual daily wages; household wage earnings; agriculture; rural economy; wage results.;
    All these keywords.

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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