Policy externalities and banking integration

Michael Smolyansky

Journal of Financial Economics, 2019, vol. 132, issue 3, 118-139

Abstract: Can policies directed at the banking sector in one jurisdiction spill over and affect real economic activity elsewhere? To investigate this question, I exploit changes in tax rates on bank profits across US states. Banks respond by reallocating small business lending to otherwise unaffected states. Moreover, counties in non-tax-changing states that have more exposure to treated banks experience greater changes in lending, which in turn impacts local employment. The findings demonstrate that policies aimed at the banking sector in one jurisdiction can impose externalities on other regions. Critically, financial linkages between regions serve as the transmission channel for these policy externalities.

Keywords: Banks; Credit supply; Policy arbitrage; Small business lending; Taxation (search for similar items in EconPapers)
JEL-codes: G21 G28 H23 H25 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:132:y:2019:i:3:p:118-139

DOI: 10.1016/j.jfineco.2018.11.001

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