The Domestic and International Effects of Interstate U.S. Banking

Fabio Ghironi and Viktors Stebunovs

No 765, Boston College Working Papers in Economics from Boston College Department of Economics

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: Business cycle volatility; Current account; Deregulation; Interstate banking; Producer entry; Real exchange rate (search for similar items in EconPapers)
JEL-codes: E32 F32 F41 G21 (search for similar items in EconPapers)
Date: 2010-12-17
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-opm
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Related works:
Journal Article: The domestic and international effects of interstate U.S. banking (2015)
Working Paper: The Domestic and International Effects of Interstate U.S. Banking (2014)
Working Paper: The Domestic and International Effects of Interstate U.S. Banking (2014)
Working Paper: The Domestic and International Effects of Interstate U.S. Banking (2010)
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