Macroeconomic Implications of U.S. Banking Liberalisation
I develop a Dynamic Stochastic General Equilibrium (DSGE) model featuring imperfect competition in banking to shed light on the macroeconomic repercussions of U.S. banking deregulation during the 1980s and 1990s. Banks function as traditional financial intermediaries, transferring funds from private households to entrepreneurs in the economy. Prior to deregulation, banks exploit their market power and charge high interest rates on loans to entrepreneurs. Financial liberalisation leads to more vigorous competition among banks, which effectively ameliorates credit market access of investors. I construct model generated panel data and reproduce various regression exercises implemented in related studies. In doing so, I contribute to bridging the gap between my theoretical framework and the vast empirical literature on U.S. banking deregulation. The model succeeds in both qualitatively and quantitatively replicating several empirical findings. In particular, bank market integration is associated with (i) an increase in investment in new firms, (ii) a decline in average firm size, (iii) an erosion of the bank capital ratio, (iv) a reduction of state business cycle volatility, and (v) improved consumption risk sharing of entrepreneurs.
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