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

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