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

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  • Fabio Ghironi
  • Viktors Stebunovs

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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16613.

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Date of creation: Dec 2010
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Handle: RePEc:nbr:nberwo:16613

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Cited by:
  1. repec:diw:diwfin:diwfin04040 is not listed on IDEAS
  2. Bremus, Franziska & Buch, Claudia M. & Russ, Katheryn N. & Schnitzer, Monika, 2013. "Big Banks and Macroeconomic Outcomes: Theory and Cross-Country Evidence of Granularity," Munich Reprints in Economics, University of Munich, Department of Economics 20226, University of Munich, Department of Economics.
  3. Franziska Bremus, 2013. "Cross-Border Banking, Bank Market Structures and Market Power: Theory and Cross-Country Evidence," Discussion Papers of DIW Berlin, DIW Berlin, German Institute for Economic Research 1344, DIW Berlin, German Institute for Economic Research.
  4. Franziska Bremus, 2011. "Financial Integration and Macroeconomic Stability: What Role for Large Banks?," Discussion Papers of DIW Berlin, DIW Berlin, German Institute for Economic Research 1178, DIW Berlin, German Institute for Economic Research.

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