The effects of financial development in the short and long run: Theory and evidence from India

Fulford, Scott

doi:10.1016/j.jdeveco.2013.04.005

Cited by 37 publications

(23 citation statements)

References 43 publications

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“…Also, increased uptake of credit could play a role in decreasing savings of stored rice: additional credit could further crowd in input use at planting, which increases output and decreases the need for precautionary savings (Fulford, 2013).…”

mentioning

confidence: 99%

Technological Innovations, Downside Risk, and the Modernization of Agriculture

Emerick

Janvry

Sadoulet

et al. 2016

American Economic Review

273

163

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We use a randomized experiment in India to show that improved technology enhances agricultural productivity by crowding in modern inputs and cultivation practices. Specifically, we show that a new rice variety that reduces downside risk by providing flood tolerance has positive effects on adoption of a more labor intensive planting method, area cultivated, fertilizer usage, and credit demand. We find that a large share of the expected gains from new technology comes from crowding in of other investments. Therefore, improved technologies that reduce risk by protecting production in bad years have the potential to increase agricultural productivity in normal years.

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mentioning

confidence: 99%

Technological Innovations, Downside Risk, and the Modernization of Agriculture

Emerick

Janvry

Sadoulet

et al. 2016

American Economic Review

273

163

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“…Over the long term, since consumers hold less debt, consumption may actually increase. This path is the reverse of what happens following an increase in credit limits (Fulford 2013a). The effects of a decrease in the credit limit and an increase in the probability of losing credit limits somewhat offset each other.…”

Section: What Happens When Credit Limit Uncertainty Increases?mentioning

confidence: 91%

“…If they have enough bad shocks that they want to borrow, however, they are much more likely to keep key papers in a large buffer stock and precautionary savings literature are: Schechtman and Escudero (1977), Deaton (1991), andCarroll (1997). Fulford (2013a) examines the short and long-term consequences of a permanent change in the liquidity constraint. Ludvigson (1999) examines stochastic credit limits, although explicitly restricts the analysis to exclude borrowing and saving at the same time, suggesting that to do so is a "challenging direction" for research (p. 436).…”

Section: Does This Volatility Affect Household Decisions? To Answer Tmentioning

confidence: 99%

“…Consumption declines slightly to accommodate the higher interest payments, but a pure increase in volatility has a relatively small aggregate effect. Coupled with a decline for all consumers in available credit, the effects are more dramatic: an immediate fall in consumption of around 2 percent following the reverse of the path shown by Fulford (2013a) for an increase in the credit limit. The fall in available credit reduces debt and so mostly cancels out the increase in debt from rebalancing the portfolio.…”

Section: Does This Volatility Affect Household Decisions? To Answer Tmentioning

confidence: 99%

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How Important is Variability in Consumer Credit Limits?

Fulford¹

2014

SSRN Journal

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Credit limit variability is a crucial aspect of the consumption, savings, and debt decisions of households in the United States. Using a large panel this paper first demonstrates that individuals gain and lose access to credit frequently and often have their credit limits reduced unexpectedly. Credit limit volatility is larger than most estimates of income volatility and varies over the business cycle. While typical models of intertemporal consumption fix the credit limit, I introduce a model with variable credit limits. Variable credit limits create a reason for households to hold both high interest debts and low interest savings at the same time since the savings act as insurance. Simulating the model using the estimates of credit limit volatility, I show that it explains all of the credit card puzzle: why around a third of households in the United States hold both debt and liquid savings at the same time. The approach also offers an important new channel through which financial system uncertainty can affect household decisions.JEL classification: E21, D91, D14

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“…23 In a partial equilibrium model, Fulford (2013) shows that the welfare effects of relaxing borrowing constraints are positive in the short-run, but might be negative in the long-run. In sum, because of these caveats, it is difficult to directly derive policy recommendations from our findings.…”

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confidence: 99%

Public versus private provision of liquidity: Is there a trade-off?

Röhrs

Winter

2015

Journal of Economic Dynamics and Control

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To what extent is public debt private liquidity? Much policy advice given in the aftermath of the financial crisis rests on the assumption that increasing public debt relaxes borrowing constraints of private households. This is the case for ad-hoc debt limits, which are exogenous to public policy. Instead, if debt limits are fully endogenous, as e.g. in the case of the natural borrowing limit, public debt has no impact. We assume that borrowing limits arise because of limited contract enforceability and are therefore determined as equilibrium outcomes. Using an incomplete markets economy in which households are subject to uninsurable earnings shocks, we show that public debt provides some liquidity, but less so than it would if constraints were imposed ad-hoc. We show that generating borrowing constraints as an equilibrium outcome substantially alters the answers to other important questions, such as for the welfare effects of government debt or its impact on real economic activity. To what extent is public debt private liquidity? Much policy advice given in the aftermath of the financial crisis rests on the assumption that increasing public debt relaxes borrowing constraints of private households. This is the case for ad-hoc debt limits, which are exogenous to public policy. Instead, if debt limits are fully endogenous, as e.g. in the case of the natural borrowing limit, public debt has no impact. We assume that borrowing limits arise because of limited contract enforceability and are therefore determined as equilibrium outcomes. Using an incomplete markets economy in which households are subject to uninsurable earnings shocks, we show that public debt provides some liquidity, but less so than it would if constraints were imposed ad-hoc. We show that generating borrowing constraints as an equilibrium outcome substantially alters the answers to other important questions, such as for the welfare effects of government debt or its impact on real economic activity.

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The effects of financial development in the short and long run: Theory and evidence from India

Cited by 37 publications

References 43 publications

Technological Innovations, Downside Risk, and the Modernization of Agriculture

Technological Innovations, Downside Risk, and the Modernization of Agriculture

How Important is Variability in Consumer Credit Limits?

Public versus private provision of liquidity: Is there a trade-off?

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