Policy Externalities and Banking Integration

52 Pages Posted: 9 Feb 2016 Last revised: 29 Apr 2020

See all articles by Michael Smolyansky

Michael Smolyansky

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: February, 2016

Abstract

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.

JEL Classification: G20, G21, H23, H25

Suggested Citation

Smolyansky, Michael, Policy Externalities and Banking Integration (February, 2016). FEDS Working Paper No. 2016-8, Available at SSRN: https://ssrn.com/abstract=2729662 or http://dx.doi.org/10.17016/FEDS.2016.008r1

Michael Smolyansky (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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