Credit constraints, productivity shocks and consumption volatility in emerging economies

NIPFP Working Paper 121
[Link]

Rudrani Bhattacharya and Ila Patnaik
March 2013

Abstract

How does access to credit 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. We address this puzzle 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. Unconstrained households can respond to shocks to trend growth by raising current consumption more than 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.

Emerging Economy Business Cycles: Financial Integration and Terms of Trade Shocks

NIPFP Working Paper 120
[Link]

Rudrani Bhattacharya, Ila Patnaik and Madhavi Pundit
March 2013

Abstract

This paper analyses the extent to which financial integration impacts the manner in which terms of trade affect business cycles in emerging economies. Using a small open economy model, we show that as capital account openness increases in an economy that faces trade shocks, business cycle volatility reduces. For an economy with limited financial openness, and a relatively open trade account, a model with exogenous terms of trade shocks is able to replicate the features of the business cycle.

Has India Emerged? Business Cycle Facts from a Transitioning Economy

NIPFP Working Paper 88
[Link]

Chetan Ghate, Radhika Pandey, and Ila Patnaik
April 2011

Abstract

This paper presents a comprehensive set of stylised facts for business cycles in India from 1950-2009. We find that the nature of the business cycle has changed dramatically after India's liberalisation reforms in 1991. In particular, after the mid 1990s, the properties of India's business cycle has moved closer in key respects to select advanced countries. This is consistent with India's structural transformation from a pre-dominantly agricultural and planned developing economy to a more market based industrial-income economy. We also identify in what respects the behavior of the Indian business cycle is different from that of other advanced economies, and closer to that of other less developed economies. This is the first exercise of this kind to generate an exhaustive set of stylised facts for India using both annual and quarterly data.