Policy Externalities and Banking Integration
70 Pages Posted: 30 Nov 2014 Last revised: 10 Jun 2018
Date Written: May 23, 2018
Can policies directed at the banking sector in one jurisdiction spill over and affect real economic activity elsewhere? To investigate this question, I exploit changes in tax rates on bank profits across U.S. states. Banks respond by reallocating small-business lending to otherwise unaffected states. Moreover, counties in non-tax-changing states that have more exposure to treated banks experience greater changes in lending, which in turn impacts local employment. The findings demonstrate that policies aimed at the banking sector in one jurisdiction can impose externalities on other regions. Critically, financial linkages between regions serve as the transmission channel for these policy externalities.
Keywords: Banks, Credit Supply, Policy Arbitrage, Small Business Lending, Taxation
JEL Classification: G20, G21, H23, H25
Suggested Citation: Suggested Citation