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Financial Reforms and Consumption Smoothing

  • Martin Boileau EMAIL logo and Tianxiao Zheng

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.

JEL Classifications: E21; E26; F41; F44

Corresponding author: Martin Boileau, University of Colorado, 256 UCB, Boulder, CO 80309, USA, E-mail:

Article Note: The views expressed in this paper are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.


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Received: 2019-09-17
Revised: 2021-04-11
Accepted: 2021-05-25
Published Online: 2021-06-16

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