Banking networks and economic growth: from idiosyncratic shocks to aggregate fluctuations

Shohini Kundu and Nishant Vats

No 3019, Working Paper Series from European Central Bank

Abstract: This paper investigates the role of banking networks in the transmission of shocks across borders. Combining banking deregulation in the US with state-level idiosyncratic demand shocks, we show that geographically diversified banks reallocate funds from economies experiencing negative shocks to unaffected regions. Our findings indicate that in the presence of idiosyncratic shocks, financial integration reduces business cycle comovement and synchronizes consumption patterns. Our findings contribute to explaining the Great Moderation and provide empirical support for theories that predict that banking integration facilitates the insurance of region-specific risk and the efficient allocation of resources as markets become more complete. JEL Classification: E32, F36, G21

Keywords: business cycles; economic growth; financial integration; great moderation; idiosyncratic shocks; regional economics (search for similar items in EconPapers)
Date: 2025-02
New Economics Papers: this item is included in nep-fdg, nep-inv and nep-net
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253019

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