Economics Job Candidate Seminar

THIS SEMINAR WILL NOW BE HELD ON ZOOM.
PLEASE CONTACT SABRINA HAMEISTER FOR THE LINK.

Abstract: What drives the integration of national financial markets, and what are its consequences for regional growth? We digitize and collect US state-level banking data from 1953 to 1983 and document a tight link between high nominal short rates and financial integration, as measured by the narrowing of regional differences in bank loan interest rates. We explain this pattern with a model in which banks face frictions in accessing external capital markets and are restricted by regulation from using internal capital markets to move funds across regions. An increase in the nominal rate fosters integration because it prompts households to move their liquidity away from unremunerated deposits at their local banks and towards national money markets (e.g., via money-market funds). This forces banks to seek more funding from national markets and makes lending less dependent on local deposits, which ultimately erodes regional differences in bank loan interest rates. We nest our banking model in a quantitative dynamic spatial model and show that financial integration explains up to a fifth of the higher observed growth in GDP and population of the American South and West and of the relative decline of the Northern financial centers. We draw the implications of our findings for current debates on capital market integration. Low-rate environments amplify frictions introduced by restrictions on capital flows, substantially increasing the gains from deregulation.

Written with Maxim Alekseev.