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

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  • Fabio Ghironi

    ()
    (Boston College)

  • Viktors Stebunovs

    (Board of Governors of the Federal Reserve System)

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.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 765.

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Date of creation: 17 Dec 2010
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Handle: RePEc:boc:bocoec:765

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Keywords: Business cycle volatility; Current account; Deregulation; Interstate banking; Producer entry; Real exchange rate;

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Cited by:
  1. Franziska Bremus, 2013. "Cross-Border Banking, Bank Market Structures and Market Power: Theory and Cross-Country Evidence," Discussion Papers of DIW Berlin 1344, DIW Berlin, German Institute for Economic Research.
  2. Franziska Bremus & Claudia Buch & Katheryn Russ & Monika Schnitzer, 2013. "Big Banks and Macroeconomic Outcomes: Theory and Cross-Country Evidence of Granularity," NBER Working Papers 19093, National Bureau of Economic Research, Inc.
  3. Franziska Bremus, 2011. "Financial Integration and Macroeconomic Stability: What Role for Large Banks?," Discussion Papers of DIW Berlin 1178, DIW Berlin, German Institute for Economic Research.
  4. Sven Blank, 2009. "International Consumption Risk Sharing and Monetary Policy," Working Paper / FINESS 4.4, DIW Berlin, German Institute for Economic Research.

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