Measuring the Equilibrium Impacts of Credit: Evidence from the Indian Microfinance Crisis

Emily Breza and Cynthia Kinnan

No 24329, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In October 2010, the state government of Andhra Pradesh, India issued an emergency ordinance, bringing microfinance activities in the state to a complete halt and causing a nation-wide shock to the liquidity of lenders, especially those with loans in the affected state. We use this massive dislocation in the microfinance market to identify the causal impacts of a reduction in credit supply on consumption, earnings, and employment in general equilibrium in rural labor markets. Using a proprietary district-level data set from 25 separate, for-profit microlenders matched with household data from the National Sample Survey, we find that district-level reductions in credit supply are associated with significant decreases in casual daily wages, household wage earnings and consumption. We find a substantial consumption multiplier from credit that is likely driven by two channels – aggregate demand and business investment. We calibrate a simple two-period, two-sector model of the rural economy that incorporates both channels and show that the magnitude of our wage results is consistent with the model’s predictions.

JEL-codes: D50 G21 O16 (search for similar items in EconPapers)
Date: 2018-02
New Economics Papers: this item is included in nep-agr, nep-ban, nep-lma and nep-mfd
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Citations: View citations in EconPapers (14)

Published as Emily Breza & Cynthia Kinnan, 2021. "Measuring the Equilibrium Impacts of Credit: Evidence from the Indian Microfinance Crisis," The Quarterly Journal of Economics, vol 136(3), pages 1447-1497.

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Journal Article: Measuring the Equilibrium Impacts of Credit: Evidence from the Indian Microfinance Crisis* (2021)
Working Paper: Measuring the Equilibrium Impacts of Credit: Evidence from the Indian Microfinance Crisis (2018)
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