Does financial inclusion promote consumption smoothing? Evidence from emerging and developing economies

Tony Cavoli and Sasidaran Gopalan

International Review of Economics & Finance, 2023, vol. 88, issue C, 1529-1546

Abstract: An important issue for emerging and developing economies (EMDEs) is how to reduce the occurrence of hand-to-mouth consumption by allowing consumption smoothing. Financial inclusion increases access to the formal banking system and financial markets, and allows households to use more appropriate financial instruments, which should enable them to diversify consumption, disrupting the connection to idiosyncratic income shocks. This paper empirically investigates whether financial inclusion can smooth consumption and promote risk sharing for a large heterogenous sample of 85 EMDEs for 1995 to 2017. We find that financial inclusion decreases the volatility of consumption and reduces deviations in country consumption vs world consumption. Curiously, we find that financial inclusion does not help countries improve risk sharing by lowering their exposure to idiosyncratic output shocks. We further find that risk sharing through domestic credit markets expands with financial inclusion, although it does not appear to reduce unsmoothed consumption.

Keywords: Financial inclusion; Consumption volatility; Consumption smoothing; Consumption risk sharing; Panel data (search for similar items in EconPapers)
JEL-codes: E44 F36 F41 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:88:y:2023:i:c:p:1529-1546

DOI: 10.1016/j.iref.2023.07.037

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