Financial Inclusion, Productivity Shocks, and Consumption Volatility in Emerging Economies

How does access to finance 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. This puzzle is addressed in the framework of an emerging economy model in which households face shocks to trend growth rate, and a fraction of them are financially constrained, with no access to financial services. Unconstrained households can respond to shocks to trend growth by raising current consumption more than the 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.

Bibliographic Details

Main Authors:	Bhattacharya, Rudrani, Patnaik, Ila
Format:	Working Paper biblioteca
Language:	English en_US
Published:	World Bank, Washington, DC 2015-06
Subjects:	GROWTH RATES, MONETARY POLICY, DEPOSIT, FINANCIAL SERVICES, FOREIGN CAPITAL, FOREIGN DEBT, DEPOSITS, CAPITAL ACCUMULATION, STOCK, STRUCTURAL CHANGE, DISPOSABLE INCOME, INCOME, INTEREST, EMERGING ECONOMIES, INTEREST RATE, REAL GDP, EXCHANGE, DISCOUNT RATE, MACROECONOMIC POLICY, BANKING SERVICES, INTERNATIONAL FINANCIAL MARKETS, LIQUIDITY, DEVELOPING COUNTRIES, EXPORTS, ELASTICITY, POLITICAL ECONOMY, DEVELOPING ECONOMIES, INTERNATIONAL LABOUR ORGANIZATION, ECONOMIC RELATIONS, INTERNATIONAL BUSINESS, WORLD DEVELOPMENT INDICATORS, VARIABLES, CAPITAL STOCK, INPUTS, FINANCIAL INTEGRATION, SAVINGS INSTRUMENTS, DEVELOPING COUNTRY, TRENDS, ECONOMIC OUTLOOK, CENTRAL BANK, SMOOTHING CONSUMPTION, DEVELOPMENT, ADVANCED COUNTRIES, TRADE BALANCE, TOTAL FACTOR PRODUCTIVITY, SAVINGS, DEVELOPMENT ECONOMICS, INFORMAL ECONOMY, COMMERCIAL BANK, ADVANCED ECONOMIES, CAPITAL CONTROL, RESERVE BANK, VOLATILITIES, PRODUCTIVITY, INTEREST RATES, EMERGING MARKET, NET EXPORTS, DEBT, FINANCIAL FLOWS, PUBLIC FINANCE, OPEN ECONOMY, SOCIAL PROTECTION, FINANCIAL REFORMS, REAL INTEREST RATE, AGENCY COSTS, UTILITY, FINANCIAL SYSTEM, LIBERALIZATION, BANK DEPOSITS, FLOWS OF CAPITAL, EMERGING MARKETS, PRODUCTIVITY GROWTH, CONSUMPTION, GROSS FIXED CAPITAL FORMATION, CAPITAL CONTROLS, CREDIT CONSTRAINTS, EMERGING MARKET BUSINESS, CAPITAL, FINANCIAL TRANSACTIONS, VOLATILITY, HOME COUNTRY, FINANCIAL CRISIS, FUTURE, VALUE, FOREIGN DIRECT INVESTMENT, CREDIT, FIXED CAPITAL, MACROECONOMICS, PERMANENT INCOME, ECONOMIC FLUCTUATIONS, ECONOMY, AGRICULTURE, CONSUMERS, CAPITAL FLOWS, EQUATIONS, MEASUREMENT, BENCHMARK, PRODUCTION FUNCTION, TERMS OF CAPITAL, OUTPUT, CLOSED ECONOMY, BANK ACCOUNTS, LONG-TERM INVESTMENTS, EXPOSURE, BUSINESS CYCLES, PERMANENT INCOME HYPOTHESIS, ECONOMIC DEVELOPMENT, TRADE, GDP, GOODS, THEORY, EMERGING ECONOMY, FINANCIAL DEVELOPMENT, FINANCIAL MARKET, GROWTH RATE, INVESTMENT, BOND, RANDOM WALK, COMMERCIAL BANKS, SHARE, FINANCIAL MARKETS, BANKING, FINANCIAL ASSETS, INVESTMENTS, CAPITAL ACCOUNTS, EXCHANGE RATE, FINANCIAL REFORM, TOTAL OUTPUT, FINANCIAL SECTOR, OPEN ECONOMIES, COMMODITY, FINANCIAL CONSTRAINTS, CAPITAL ACCOUNT, PRICES, FINANCIAL SECTOR DEVELOPMENT, DEVELOPMENT POLICY,
Online Access:	http://documents.worldbank.org/curated/en/2015/06/24582431/financial-inclusion-productivity-shocks-consumption-volatility-emerging-economies https://hdl.handle.net/10986/22161
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