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

Emily Breza and Cynthia Kinnan

The Quarterly Journal of Economics, 2021, vol. 136, issue 3, 1447-1497

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 nationwide 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.

Date: 2021
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Citations: View citations in EconPapers (28)

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Working Paper: Measuring the Equilibrium Impacts of Credit: Evidence from the Indian Microfinance Crisis (2018) Downloads
Working Paper: Measuring the Equilibrium Impacts of Credit: Evidence from the Indian Microfinance Crisis (2018) Downloads
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The Quarterly Journal of Economics is currently edited by Robert J. Barro, Lawrence F. Katz, Nathan Nunn, Andrei Shleifer and Stefanie Stantcheva

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