Working Paper: NBER ID: w16613
Authors: Fabio Ghironi; Viktors Stebunovs
Abstract: This paper studies the domestic and international effects of the transition to an interstate banking system implemented by the U.S. since the late 1970s in a dynamic, stochastic, general equilibrium model with endogenous producer entry. Interstate banking reduces the degree of local monopoly power of financial intermediaries. We show that the an economy that implements this form of deregulation experiences increased producer entry, real exchange rate appreciation, and a current account deficit. The rest of the world experiences a long-run increase in GDP and consumption. Less monopoly power in financial intermediation results in less volatile business creation, reduced markup countercyclicality, and weaker substitution effects in labor supply in response to productivity shocks. Bank market integration thus contributes to a moderation of firm-level and aggregate output volatility. In turn, trade and financial ties between the two countries in our model allow also the foreign economy to enjoy lower GDP volatility in most scenarios we consider. The results of the model are consistent with features of the U.S. and international business cycle after the U.S. began its transition to interstate banking.
Keywords: interstate banking; macroeconomic stability; producer entry; business cycles
JEL Codes: E32; F32; F41; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Removal of banking segmentation in the US (G28) | Reduced local monopoly power of banks (E58) |
| Reduced local monopoly power of banks (E58) | Increased producer entry (L11) |
| Increased producer entry (L11) | Real exchange rate appreciation (F31) |
| Increased producer entry (L11) | Current account deficit (F32) |
| Reduced monopoly power in financial intermediation (G21) | Less volatile business creation (L26) |
| Reduced monopoly power in financial intermediation (G21) | Reduction in markup countercyclicality (E31) |
| Reduced monopoly power in financial intermediation (G21) | Weaker substitution effects in labor supply in response to productivity shocks (J29) |
| Weaker substitution effects in labor supply in response to productivity shocks (J29) | Moderate firm-level output volatility (E69) |
| Weaker substitution effects in labor supply in response to productivity shocks (J29) | Moderate aggregate output volatility (E39) |
| Interconnectedness of trade and financial ties (F65) | Long-run increase in GDP and consumption in the rest of the world (F62) |