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Financial inclusion, productivity shocks, and consumption volatility in emerging economies

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  • Bhattacharya,Rudrani
  • Patnaik,Ila

Abstract

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.

Suggested Citation

  • Bhattacharya,Rudrani & Patnaik,Ila, 2015. "Financial inclusion, productivity shocks, and consumption volatility in emerging economies," Policy Research Working Paper Series 7288, The World Bank.
    • Handle: RePEc:wbk:wbrwps:7288
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    Cited by:

    1. Brendan Epstein & Alan Finkelstein Shapiro, 2021. "Increasing Domestic Financial Participation: Implications for Business Cycles and Labor Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 39, pages 128-145, January.
    2. Mohimont, Jolan, 2022. "Welfare effects of business cycles and monetary policies in a small open emerging economy," Journal of Economic Dynamics and Control, Elsevier, vol. 136(C).
    3. Chetan Ghate & Pawan Gopalakrishnan & Anuradha Saha, 2023. "The Great Indian Savings Puzzle," IEG Working Papers 459, Institute of Economic Growth.
    4. Cyn-Young Park & Rogelio Mercado Jr., 2018. "Financial Inclusion: New Measurement and Cross-Country Impact Assessment," Working Papers wp29, South East Asian Central Banks (SEACEN) Research and Training Centre.
    5. Compaoré, Ali, 2022. "Access-for-all to financial services: Non-resources tax revenue-harnessing opportunities in developing countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 236-245.
    6. Barrail, Zulma, 2020. "Business cycle implications of rising household credit market participation in emerging countries," Journal of Economic Dynamics and Control, Elsevier, vol. 116(C).
    7. Ali Compaore, 2020. "Access-for-all to Financial Services: Non- resources Tax Revenue-harnessing Opportunities in Developing Countries," Working Papers hal-02901664, HAL.

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    Keywords

    Economic Theory&Research; Debt Markets; Emerging Markets; Economic Conditions and Volatility; Consumption;
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