The Effects of Changes in Local-Bank Health on Household Consumption
Studies examining the connections between consumption and the financial sector focus primarily on wealth effects. They generally concentrate on the role of falling house prices or household financial distress and deleveraging. Although those factors played a role in the 2007–2009 US financial crisis, the linkages between the financial sector and household consumption are broader and more complex.
This paper explores the effect of credit availability on household consumption beyond the standard income and wealth channels. Specifically, it investigates the link between local-bank health and the consumption of renters as well as homeowners in local (often metropolitan) areas using household-level data from the Panel Study of Income Dynamics, along with measures of bank health at the local level. The analysis incorporates an innovative approach to identifying households likely in need of bank credit whose consumption is potentially particularly susceptible to changes in credit availability.