Working Paper: NBER ID: w20239
Authors: Felipe Kast; Dina Pomeranz
Abstract: Poverty is often characterized not only by low and unstable income, but also by heavy debt burdens. We find that reducing barriers to saving through access to free savings accounts decreases participants' short-term debt by about 20%. In addition, participants who experience an economic shock have less need to reduce consumption, and subjective well-being improves significantly. Precautionary savings and credit therefore act as substitutes in providing self-insurance, and participants prefer borrowing less when a free formal savings account is available. Take-up patterns suggest that requests by others for participants to share their resources may be a key obstacle to saving.
Keywords: savings; debt; poverty alleviation; microfinance; Chile
JEL Codes: D14; D91; G22; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reduces participants' short-term debt (G51) | Decrease in borrowing from family and friends (G51) |
| Improvements in subjective well-being (I31) | Less anxiety about financial future (G59) |
| Improvements in subjective well-being (I31) | Evaluating recent economic difficulties as less severe (E66) |
| Access to free savings accounts (G21) | Reduces participants' short-term debt (G51) |
| Access to free savings accounts (G21) | Decrease in borrowing from parents (G51) |
| Access to free savings accounts (G21) | Enhanced consumption smoothing (D15) |
| Access to free savings accounts (G21) | Improvements in subjective well-being (I31) |
| Access to free savings accounts (G21) | No significant impact on long-term debt (G32) |