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Softening the blow: U.S. state-level banking deregulation and sectoral reallocation after the China trade shock

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  • Mathias Hoffmann
  • Lilia Ruslanova

Abstract

U.S. state-level banking deregulation during the 1980’s mitigated the impact of the China trade shock (CTS) on local economies (states and commuting zones) a decade later, in the 1990s. Local economies, where local banking markets opened up earlier, were also effectively financially more integrated by the 1990’s and saw smaller declines in house prices, wages, and income following the CTS. We explain this pattern in a theoretical model that emphasizes the stabilizing effect of financial integration on demand for housing and on housing prices: faced with an adverse shock to their region’s terms-of-trade (i.e. the CTS), households in more open states can more easily access credit to smooth consumption. This stabilizes consumer demand for housing, keeps the relative price of housing up, stabilizes wages in the non-tradable sector and thus facilitates the sectoral reallocation of labor away from import-exposed manufacturing towards the housing sector. This in turn stabilizes income and consumption. We corroborate these predictions of our model in state- and commuting zone level data. Then, using granular bank-county-level data, we show that household consumption smoothing in response to the CTS was easier in financially open areas, because geographically diversified banks were more elastic in their lending response to household’s increased demand for credit. Our findings highlight the importance of household access to finance in the adjustment to asymmetric terms-of-trade shocks in monetary unions.

Suggested Citation

  • Mathias Hoffmann & Lilia Ruslanova, 2020. "Softening the blow: U.S. state-level banking deregulation and sectoral reallocation after the China trade shock," ECON - Working Papers 365, Department of Economics - University of Zurich.
  • Handle: RePEc:zur:econwp:365
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    References listed on IDEAS

    as
    1. Mathias Hoffmann & Iryna Stewen, 2020. "Holes in the Dike: The Global Savings Glut, U.S. House Prices, and the Long Shadow of Banking Deregulation," Journal of the European Economic Association, European Economic Association, vol. 18(4), pages 2013-2055.
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    More about this item

    Keywords

    Banking deregulation; China trade shock; sectoral reallocation; house prices; consumer access to finance;
    All these keywords.

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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