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Banking Networks and Economic Growth: From Idiosyncratic Shocks to Aggregate Fluctuations

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  • Shohini Kundu
  • Nishant Vats

Abstract

This paper investigates the role of banking networks in the transmission of shocks across borders. Combining banking deregulation in the United States 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.

Suggested Citation

  • Shohini Kundu & Nishant Vats, 2026. "Banking Networks and Economic Growth: From Idiosyncratic Shocks to Aggregate Fluctuations," American Economic Journal: Macroeconomics, American Economic Association, vol. 18(2), pages 332-377, April.
    • Handle: RePEc:aea:aejmac:v:18:y:2026:i:2:p:332-77
    DOI: 10.1257/mac.20220153
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    Cited by:

    1. Nicola Cetorelli & Shohini Kundu, 2026. "Regulatory Arbitrage Within the Firm," Staff Reports 1196, Federal Reserve Bank of New York.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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