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Deposit facilities and consumption smoothing dynamic stochastic model of precautionary wealth choices for a credit-constrained rural household /

by 1972- Gomez-Soto, Franz Marcelo

Abstract (Summary)
This dissertation examines two issues. One is does more convenient access to safer deposit facilities affect the level and composition of the precautionary wealth portfolio of credit-constrained rural households. The other one is the extent to which the resulting changes in precautionary wealth may be linked to smoother consumption patterns. This is accomplished by solving a dynamic stochastic model on wealth portfolio choices. In the model, households make three decisions: how much to consume, how much to save in a bank, and how much livestock to keep in the barn. Portfolio decisions depend on the rates of return for each asset, transaction costs, and the impact of systemic shocks on labor income, the price of livestock, and the expected return on deposits–given the probability of bank bankruptcy. Simulation results reveal how much increased access to deposit facilities, measured in terms of a reduction in transaction costs, improves the ability of creditconstrained households to insulate consumption from income variations due to systemic shocks. This expansion of the outreach of deposit facilities will be more important for household’s welfare the riskier is the environment where they operate. The simulation results also show that effective financial regulation and supervision and the promotion of robust financial institutions, which are less vulnerable to systemic shocks, create an environment conducive to the holding of a greater share of precautionary wealth in the ii form of deposits. This reduces the costs for households of risk management and consumption smoothing. It also improves the economy’s allocation of resources through increased financial intermediation. The research sheds light on policy debates about strategies for rural deposit mobilization. iii
Bibliographical Information:

Advisor:

School:The Ohio State University

School Location:USA - Ohio

Source Type:Master's Thesis

Keywords:wealth saving and investment consumption economics risk dynamic programming

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