Financial access in buffer-stock economies: Theory and evidence from india

Type Working Paper - (unpublished draft)
Title Financial access in buffer-stock economies: Theory and evidence from india
Author(s)
Publication (Day/Month/Year) 2009
URL https://www2.bc.edu/~fulfords/research/Financial Access (Fulford JMP).pdf
Abstract
This paper examines how a community of buffer-stock consumers responds to loosened liquidity constraints and to an increase in the return on savings that is suf?cient to overcome their impatience. Although loosening liquidity constraints produces an immediate increase in consumption for everyone, the distribution of consumption eventually falls to a new stationary distribution with a lower cross-sectional mean. Loosening liquidity constraints does not create long-term consumption growth, although it does improve welfare. An increase in the return on savings, however, can cause consumption to grow if the rate of return is greater than the discount rate. Such a change will also increase inequality if there is heterogeneity in the rate of time preference or if some communities or portions of communities have access while others do not. The theoretical results show that evaluating the effects of changes in ?nancial access on consumption, poverty, and inequality is dif?cult, since the long-term effects can be very different from the short-term effects. Changes in ?nancial access must be evaluated over time. Simulations illustrate the dif?culties. A panel of regions in India combining newly created measures of consumption with data on bank branch expansion gives support for the consumption path the theory describes. Mean consumption in areas that gain bank branches increases substantially at ?rst, but then falls. The paper also examines the effects of new branches on inequality, education, and poverty.

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