Community Bank Establishment and Consumption Growth: Evidence from Panel Study of Income Dynamics in USA

TL;DR

This study demonstrates that establishing community banks in the USA significantly boosts local household consumption by increasing income and reducing savings, thereby supporting economic growth.

Contribution

It provides empirical evidence using panel data and a fixed-effects DID model that community banks promote consumption growth, a novel analysis in this context.

Findings

Community banks increase household income.

They reduce precautionary savings.

They stimulate local consumption growth.

Abstract

Consumption is a primary source of economic growth and key indicator of poverty. The establishment of community banks can provide credit resources, unlocking household consumption potential and playing a crucial role in economic development. This study explores the role of community banks in promoting consumption by using data from the Panel Study of Income Dynamics (PSID) for 11 waves from 1980 to 1990, and constructing a fixed-effects model using the time-varying difference-in-differences (DID) method. The findings indicate that the establishment of community banks effectively stimulates growth in local household consumption, primarily by increasing household income and reducing precautionary savings. Therefore, both government and financial institutions should further promote the development of regional financial institutions and credit tools to promote economic growth.