Credit Constraints, Productivity Shocks and Consumption Volatility in Emerging Economies

This paper assesses the impact of access to credit on consumption volatility. It states that theory and evidence from advanced economies suggests greater household access to finance smooths consumption. In emerging markets, where consumption is generally more volatile than income, the paper states that evidence indicates financial reform further increases the volatility of consumption relative to output. The paper addresses this paradox in the framework of an emerging economy model in which households face shocks to trend growth rate, and a fraction of them are credit constrained.