Financial outreach, bank deposits, and economic growth

Abstract

This paper explores the relationship between financial outreach and economic growth, both theoretically and empirically. Our theoretical framework suggests that financial outreach reduces household cash holdings and increases bank deposits by lowering transaction costs associated with intermediated activities, thereby boosting economic growth. This effect is more pronounced in regions with higher population density and less developed technology-based financial services. Empirical evidence from 281 prefecture-level Chinese cities supports the theory that financial outreach enhances economic growth indirectly by promoting bank deposits. These findings help explain the finance-growth puzzle in the context of China's economic dynamics.