Bhattacharya, RudraniPatnaik, Ila2015-07-142015-07-142015-06https://hdl.handle.net/10986/22161How 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.en-USCC BY 3.0 IGOGROWTH RATESMONETARY POLICYDEPOSITFINANCIAL SERVICESFOREIGN CAPITALFOREIGN DEBTDEPOSITSCAPITAL ACCUMULATIONSTOCKSTRUCTURAL CHANGEDISPOSABLE INCOMEINCOMEINTERESTEMERGING ECONOMIESINTEREST RATEREAL GDPEXCHANGEDISCOUNT RATEMACROECONOMIC POLICYBANKING SERVICESINTERNATIONAL FINANCIAL MARKETSLIQUIDITYDEVELOPING COUNTRIESEXPORTSELASTICITYPOLITICAL ECONOMYDEVELOPING ECONOMIESINTERNATIONAL LABOUR ORGANIZATIONECONOMIC RELATIONSINTERNATIONAL BUSINESSWORLD DEVELOPMENT INDICATORSVARIABLESCAPITAL STOCKINPUTSFINANCIAL INTEGRATIONSAVINGS INSTRUMENTSDEVELOPING COUNTRYTRENDSECONOMIC OUTLOOKCENTRAL BANKSMOOTHING CONSUMPTIONDEVELOPMENTADVANCED COUNTRIESTRADE BALANCETOTAL FACTOR PRODUCTIVITYSAVINGSDEVELOPMENT ECONOMICSINFORMAL ECONOMYCOMMERCIAL BANKADVANCED ECONOMIESCAPITAL CONTROLRESERVE BANKVOLATILITIESPRODUCTIVITYINTEREST RATESEMERGING MARKETNET EXPORTSDEBTFINANCIAL FLOWSPUBLIC FINANCEOPEN ECONOMYSOCIAL PROTECTIONFINANCIAL REFORMSREAL INTEREST RATEAGENCY COSTSUTILITYFINANCIAL SYSTEMLIBERALIZATIONBANK DEPOSITSFLOWS OF CAPITALEMERGING MARKETSPRODUCTIVITY GROWTHCONSUMPTIONGROSS FIXED CAPITAL FORMATIONCAPITAL CONTROLSCREDIT CONSTRAINTSEMERGING MARKET BUSINESSCAPITALFINANCIAL TRANSACTIONSVOLATILITYHOME COUNTRYFINANCIAL CRISISFUTUREVALUEFOREIGN DIRECT INVESTMENTCREDITFIXED CAPITALMACROECONOMICSPERMANENT INCOMEECONOMIC FLUCTUATIONSECONOMYAGRICULTURECONSUMERSCAPITAL FLOWSEQUATIONSMEASUREMENTBENCHMARKPRODUCTION FUNCTIONTERMS OF CAPITALOUTPUTCLOSED ECONOMYBANK ACCOUNTSLONG-TERM INVESTMENTSEXPOSUREBUSINESS CYCLESPERMANENT INCOME HYPOTHESISECONOMIC DEVELOPMENTTRADEGDPGOODSTHEORYEMERGING ECONOMYFINANCIAL DEVELOPMENTFINANCIAL MARKETGROWTH RATEINVESTMENTBONDRANDOM WALKCOMMERCIAL BANKSSHAREFINANCIAL MARKETSBANKINGFINANCIAL ASSETSINVESTMENTSCAPITAL ACCOUNTSEXCHANGE RATEFINANCIAL REFORMTOTAL OUTPUTFINANCIAL SECTOROPEN ECONOMIESCOMMODITYFINANCIAL CONSTRAINTSCAPITAL ACCOUNTPRICESFINANCIAL SECTOR DEVELOPMENTDEVELOPMENT POLICYWorking PaperWorld Bank10.1596/1813-9450-7288