Working Paper: NBER ID: w9710
Authors: Donald P. Morgan; Philip E. Strahan
Abstract: Theory suggests that bank integration (financial integration generally) can magnify or dampen the business cycles, depending on the importance of shocks to firm collateral versus shocks to the banking sector. In this paper, we show empirically that bank integration across U.S. states over the late 1970s and 1980 dampened economic volatility within states. Internationally, however, we find that foreign bank integration, which advanced widely during the 1990s, has been either unrelated to volatility of firm investment spending or positively related to that volatility. The results suggest the possibility that business spending may become more volatile as countries open their banking sectors to foreign entry.
Keywords: foreign bank entry; business volatility; economic stability; bank integration; investment spending
JEL Codes: G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bank integration by out-of-state banks (H79) | Business volatility (E32) |
| Foreign bank integration during the 1990s (F65) | Firm investment spending across countries (F23) |
| Foreign bank integration (F30) | Business spending volatility (E32) |
| Integration (F15) | Volatility within states (H73) |