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, generally concentrating 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 relationship between credit availability and household consumption using a novel approach to separate credit demand and supply. The paper uses household-level data from the Panel Study of Income Dynamics, along with measures of bank health at the local (usually metropolitan) level. The analysis addresses the potential endogeneity of local bank health by focusing on multi-locational banks, defined as those banks with branches in a given location but whose health is unlikely to be affected by local economic conditions. It further incorporates an innovative and multifaceted approach to identifying households likely in need of bank credit whose consumption is potentially particularly susceptible to changes in credit availability.
This is a substantially revised version of the original paper posted October 2018.