Abstract
We study how financial reforms affect the extent of consumption smoothing in a dynamic stochastic general equilibrium model of an emerging economy. Consistent with the empirical literature and reform efforts in South Korea and South Africa, we emphasize the relation between consumer credit and durable purchases, and model reforms as the relaxation of the collateral constraint on lower income households. We find that the relaxation of the collateral constraint accounts for a substantial share of the decline in consumption smoothing experienced in South Korea and South Africa.
References
Abiad, A., E. Detragiache, and T. Tressel. 2010. “A New Database of Financial Reforms.” IMF Staff Papers 57: 281–302. https://doi.org/10.1057/imfsp.2009.23.Search in Google Scholar
Aghion, P., P. Bacchetta, and A. Banerjee. 2004. “Financial Development and the Instability of Open Economies.” Journal of Monetary Economics 51: 1077–106. https://doi.org/10.1016/j.jmoneco.2003.12.001.Search in Google Scholar
Aguiar, M., and G. Gopinath. 2007. “Emerging Market Business Cycles: The Cycle Is the Trend.” Journal of Political Economy 115: 69–102. https://doi.org/10.1086/511283.Search in Google Scholar
Alessie, R., M. Devereux, and G. Weber. 1997. “Intertemporal Consumption, Durables and Liquidity Constraints: A Cohort Analysis.” European Economic Review 41: 37–59. https://doi.org/10.1016/0014-2921(95)00128-x.Search in Google Scholar
Alvarez-Parra, F., L. Brandao-Marques, and M. Toledo. 2013. “Durable Goods, Financial Frictions, and Business Cycles in Emerging Economies.” Journal of Monetary Economics 60: 720–36. https://doi.org/10.1016/j.jmoneco.2013.05.004.Search in Google Scholar
Aron, J., and J. Muellbauer. 2000. “Financial Liberalization, Consumption and Debt in South Africa.” In WPS 2000-22, Centre for the Study of African Economies. Oxford University.Search in Google Scholar
Aron, J., and J. Muellbauer. 2013. “Wealth, Credit Conditions and Consumption: Evidence from South Africa.” Review of Income and Wealth 59: S161–96. https://doi.org/10.1111/roiw.12033.Search in Google Scholar
Attanazio, O. P. Goldberg, and E. Kyriazidou. 2008. “Credit Constraints in the Market for Consumer Durables: Evidence from Micro Data on Car Loans.” International Economic Review 49: 401–36.10.1111/j.1468-2354.2008.00485.xSearch in Google Scholar
Bai, Y., and J. Zhang. 2012. “Financial Integration and International Risk Sharing.” Journal of International Economics 86: 17–32. https://doi.org/10.1016/j.jinteco.2011.08.009.Search in Google Scholar
Baxter, M., and U. Jermann. 1999. “Household Production and the Excess Sensitivity of Consumption to Current Income.” The American Economic Review 89: 902–20. https://doi.org/10.1257/aer.89.4.902.Search in Google Scholar
Becker, G., and C. Mulligan. 1997. “The Endogenous Determination of Time Preference.” Quarterly Journal of Economics 112: 729–58. https://doi.org/10.1162/003355397555334.Search in Google Scholar
Bekaert, G., and C. Harvey. 2005. “A Chronology of Important Financial, Economic and Political Events in Emerging Markets.” Also available at http://www.duke.edu/wcharvey/Country_risk/couindex.htm.Search in Google Scholar
Bekaert, G., C. Harvey, and C. Lundblad. 2006. “Growth Volatility and Financial Liberalization.” Journal of International Money and Finance 25: 370–403. https://doi.org/10.1016/j.jimonfin.2006.01.003.Search in Google Scholar
Benhabib, J., R. Rogerson, and R. Wright. 1991. “Homework in Macroeconomics: Household Production and Aggregate Fluctuations.” Journal of Political Economy 99: 1166–87. https://doi.org/10.1086/261796.Search in Google Scholar
Bhattacharya, R., and I. Patnaik. 2016. “Financial Inclusion, Productivity Shocks, and Consumption Volatility in Emerging Economies.” The World Bank Economic Review 30: 171–201.10.1596/27696Search in Google Scholar
Boileau, M. 1996. “Growth and the International Transmission of Business Cycles.” International Economic Review 37: 737–56. https://doi.org/10.2307/2527309.Search in Google Scholar
Born, B., and J. Pfeifer. 2014. “Risk Matters: Real Effects of Volatility Shocks: Comment.” The American Economic Review 104: 4231–9. https://doi.org/10.1257/aer.104.12.4231.Search in Google Scholar
Canova, F., and A. Ubide. 1998. “International Business Cycles, Financial Markets, and Household Production.” Journal of Economic Dynamics and Control 22: 545–72. https://doi.org/10.1016/s0165-1889(97)00068-7.Search in Google Scholar
Chah, E., V. Ramey, and R. Starr. 1995. “Liquidity Constraints and Intertemporal Consumer Optimization: Theory and Evidence from Durable Goods.” Journal of Money, Credit, and Banking 27: 272–87. https://doi.org/10.2307/2077863.Search in Google Scholar
Chang, R., and A. Fernandez. 2013. “On the Sources of Aggregate Fluctuations in Emerging Economies.” International Economic Review 54: 1265–93. https://doi.org/10.1111/iere.12036.Search in Google Scholar
Chen, K., A. Chu, and C. Lai. 2018. “Home Production and Small Open Economy Business Cycles.” Journal of Economic Dynamics and Control 95: 110–35. https://doi.org/10.1016/j.jedc.2018.08.001.Search in Google Scholar
Choi, P. 2017. Corporate Debt Market in Korea: Korea’s Economy. Mimeo: Korea Economic Institute.Search in Google Scholar
Cordoba, J. C., and M. Ripoll. 2004. “Credit Cycles Redux.” International Economic Review 45: 1011–46. https://doi.org/10.1111/j.0020-6598.2004.00296.x.Search in Google Scholar
Eisner, R. 1988. “Extended Accounts for National Income and Product.” Journal of Economic Literature 26: 1611–84.Search in Google Scholar
Faia, E. 2011. “Macroeconomic and Welfare Implications of Financial Globalization.” Journal of Applied Economics 14 (1): 119–44. https://doi.org/10.1016/s1514-0326(11)60008-1.Search in Google Scholar
Garcia-Cicco, J., R. Pancrazi, and M. Uribe. 2010. “Real Business Cycles in Emerging Countries?” The American Economic Review 100: 2510–31. https://doi.org/10.1257/aer.100.5.2510.Search in Google Scholar
Gollin, D., S. Parente, and R. Rogerson. 2004. “Farm Work, Home Work and International Productivity Dfferences.” Review of Economic Dynamics 7: 827–50. https://doi.org/10.1016/j.red.2004.05.003.Search in Google Scholar
Gomme, P., and Y. Zhao. 2010. “The Volatility of Consumption and Output with Increasing Industrialization.” In MPRA Working Paper No. 33721.Search in Google Scholar
Greenwood, J., and Z. Hercowitz. 1991. “The Allocation of Capital and Time over the Business Cycle.” Journal of Political Economy 99: 1188–214.10.1086/261797Search in Google Scholar
Guerrieri, L., and M. Iacoviello. 2015. “OccBin: A Toolkit for Solving Dynamic Models with Occasionally Binding Constraints Easily.” Journal of Monetary Economics 70: 22–38. https://doi.org/10.1016/j.jmoneco.2014.08.005.Search in Google Scholar
Hodrick, R., and E. Prescott. 1997. “Postwar U.S. Business Cycles: An Empirical Investigation.” Journal of Money, Credit, and Banking 29: 1–16. https://doi.org/10.2307/2953682.Search in Google Scholar
Hurwitz, I., and J. Luiz. 2007. “Urban Working Cass Credit Usage and Over-indebtedness in South Africa.” Journal of Southern African Studies 33: 107–31. https://doi.org/10.1080/03057070601136616.Search in Google Scholar
Iyigun, M., and A. Owen. 2004. “Income Inequality, Financial Development, and Macroeconomic Fluctuations.” Economic Journal 114: 352–76. https://doi.org/10.1111/j.1468-0297.2004.00212.x.Search in Google Scholar
Kang, S. 2001. Globalization and Income Inequality in Korea: An Overview. FDI, Human Capital and Education in Developing Countries. Technical Meeting OECD Development Centre.Search in Google Scholar
Karabarbounis, L. 2014. “Home Production, Labor Wedges, and International Business Cycles.” Journal of Monetary Economics 64: 68–84. https://doi.org/10.1016/j.jmoneco.2014.02.001.Search in Google Scholar
Karlan, D., R. Osei, I. Osei-Akoto, and C. Udry. 2014. “Agricultural Decisions after Relaxing Credit and Risk Constraints.” Quarterly Journal of Economics 129: 597–652. https://doi.org/10.1093/qje/qju002.Search in Google Scholar
Kazianga, H., and C. Udry. 2006. “Consumption Smoothing? Livestock, Insurance and Drought in Rural Burkina Faso.” Journal of Development Economics 79: 413–46. https://doi.org/10.1016/j.jdeveco.2006.01.011.Search in Google Scholar
Kiyotaki, N., and J. Moore. 1997. “Credit Cycles.” Journal of Political Economy 105: 211–48. https://doi.org/10.1086/262072.Search in Google Scholar
Kocherlakota, N. 2000. “Creating Business Cycles through Credit Constraints.” Federal Reserve Bank of Minneapolis Quarterly Review 24: 2–10. https://doi.org/10.21034/qr.2431.Search in Google Scholar
Kose, A., E. Prasad, and M. Terrones. 2009. “Does Financial Globalization Promote Risk Sharing?” Journal of Development Economics 89: 258–70.10.1016/j.jdeveco.2008.09.001Search in Google Scholar
Leblebicioglu, A. 2009. “Financial Integration, Credit Market Imperfections and Consumption Smoothing.” Journal of Economic Dynamics and Control 33: 377–93.10.1016/j.jedc.2008.06.006Search in Google Scholar
Levchenko, A. 2005. “Financial Liberalization and Consumption Volatility in Developing Countries.” IMF Staff Papers 52: 237–59.10.2307/30035897Search in Google Scholar
Ludwig, C. 2008. Trade Unions and Financial Inclusion: The Case of South Africa. Geneva: Working Paper N 51 International Labour Office.Search in Google Scholar
Mendicino, C. 2012. “On the Amplification Role of Collateral Constraints.” Economics Letters 117: 429–35. https://doi.org/10.1016/j.econlet.2012.06.007.Search in Google Scholar
Muyambiri, B., and N. Odhiambo. 2014. “A Chronological Analysis of Monetary Policy and the Financial System in South Africa.” Public and Municipal Finance 3: 19–29.Search in Google Scholar
Neumeyer, P., and F. Perri. 2005. “Business Cycles in Emerging Economies: The Role of Interest Rates.” Journal of Monetary Economics 52: 345–80. https://doi.org/10.1016/j.jmoneco.2004.04.011.Search in Google Scholar
Oh, G., and C. Rhee. 2002. “The Role of Corporate Bond Markets in the Korean Financial Restructuring Process.” In Korean Crisis and Recovery, International Monetary Fund and Korea Institute for International Economic Policy, edited by D. Coe, and S. J. Kim, 229–52. Washington: IMF.Search in Google Scholar
Okurut, F. 2006. “Access to Credit by the Poor in South Africa: Evidence from Household Survey Data 1995 and 2000.” In Stellenbosch Economic Working Papers, 13–06.Search in Google Scholar
Parente, S., R. Rogerson, and R. Wright. 2000. “Homework in Development Economics: Household Production and the Wealth of Nations.” Journal of Political Economy 108: 680–7. https://doi.org/10.1086/316102.Search in Google Scholar
Park, W. A. 1996. “Financial Liberalization: The Korean Experience.” In Financial Deregulation and Integration in East Asia, East Asia Seminar on Economics Volume 5, edited by T. Ito, and A. Krueger, 247–76. Chicago: University of Chicago Press.Search in Google Scholar
Park, C. G. 2009. “Consumer Credit Market in Korea since the Economic Crisis.” In Financial Sector Development in the Pacific Rim, East Asia Seminar on Economics Volume 18, edited by T. Ito, and A. Rose, 161–96. Chicago: University of Chicago Press.10.7208/chicago/9780226386867.003.0017Search in Google Scholar
Prasad, E., K. Rogoff, S.-J. Wei, and A. Kose. 2007. “Financial Globalization, Growth and Volatility in Developing Countries.” In Globalization and Poverty, edited by A. Harrison, 457–516. Chicago: University of Chicago Press.10.7208/chicago/9780226318004.003.0012Search in Google Scholar
Restrepo-Echavarria, P. 2014. “Macroeconomic Volatility: The Role of the Informal Economy.” European Economic Review 70: 454–69. https://doi.org/10.1016/j.euroecorev.2014.06.012.Search in Google Scholar
Rosenzweig, M., and K. Wolpin. 1993. “Credit Market Constraints, Consumption Smoothing, and the Accumulation of Durable Production Assets in Low-Income Countries: Investments in Bullocks in India.” Journal of Political Economy 101: 223–44. https://doi.org/10.1086/261874.Search in Google Scholar
Schmitt-Grohe, S., and M. Uribe. 2003. “Closing Small Open Economy Models.” Journal of International Economics 61: 163–85. https://doi.org/10.1016/s0022-1996(02)00056-9.Search in Google Scholar
Schneider, F., and D. Enste. 2000. “Shadow Economies: Size, Causes, and Consequences.” Journal of Economic Literature 38: 77–114.10.1257/jel.38.1.77Search in Google Scholar
Soon, C. 1995. “Deregulation and Economic Reform in Korea.” Korean Studies 19: 174–82.10.1353/ks.1995.0009Search in Google Scholar
Uribe, M., and V. Yue. 2006. “Country Spreads and Emerging Countries: Who Drives Whom?” Journal of International Economics 69: 6–36. https://doi.org/10.1016/j.jinteco.2005.04.003.Search in Google Scholar
Wang, P., Y. Wen, and Z. Xu. 2016. “Financial Development and Long-Run Volatility Trends.” In Working Paper 2013-003B. Federal Reserve Bank of St. Louis.10.20955/wp.2013.003Search in Google Scholar
© 2021 Walter de Gruyter GmbH, Berlin/Boston