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...
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2015
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2015/06/24582431/financial-inclusion-productivity-shocks-consumption-volatility-emerging-economies http://hdl.handle.net/10986/22161 |
| Summary: | 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. |
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