What is it about?
When households cannot borrow, the shocks to their income transmits to their consumption and reduces their welfare. We provide evidence from Iranian household data that the transmission of income shocks to consumption is really because of the borrowing constraints.
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Why is it important?
There are other explanations in the literature for the transmission of income shocks to consumption (aka excess sensitivity), but our explanation shows that the inability to borrow has welfare implications and suggests developing financial systems to offer more borrowing opportunities to more households (financial inclusion) improves their welfare.
Perspectives
This study shows the potential in Iranian household data in economic studies of consumption and saving.
Majid Einian
Read the Original
This page is a summary of: Excess sensitivity and borrowing constraints: Evidence from Iranian households, Economics of Transition and Institutional Change, July 2019, Wiley,
DOI: 10.1111/ecot.12233.
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