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

Abstract

This paper studies the domestic and international eects of national bank market integration in a two-country, dynamic, stochastic, general equilibrium model with endogenous producer entry. Integration of banking across localities reduces the degree of local monopoly power of nancial intermediaries. The economy that implements this form of deregulation experiences increased producer entry, real exchange rate appreciation, and a current account decit. The foreign economy experiences a long-run increase in GDP and consumption. Less monopoly power in nancial intermediation results in less volatile business creation, reduced markup countercyclicality, and weaker substitution eects in labor supply in response to productivity shocks. Bank market integration thus contributes to moderation of rm-level and aggregate output volatility. In turn, trade and nancial ties allow also the foreign economy to enjoy lower GDP volatility in most scenarios we consider. These results are consistent with features of U.S. and international uctuations after the United States began its transition to interstate banking in the late 1970s.