The effects of changes in local-bank health on household consumption

Cooper, Daniel H.; Peek, Joe

Working Paper Revision

The effects of changes in local-bank health on household consumption

Abstract: This study investigates the relationship between credit availability and household consumption using a novel approach to separate credit demand and supply. We find that a deterioration in local bank health reduces household consumption, with the strongest effects occurring for households that are more likely to need credit—especially those experiencing a negative income shock and having limited liquid assets. The main contributions of the study are the use of an arguably exogenous measure of local bank health and multifaceted indicators of constrained households. Our findings contribute to the discussion of the linkages between the financial sector and real economic activity.

Keywords: credit constraints; local-bank health; consumption;

JEL Classification: E21; G21;