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Policy externalities and banking integration

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  • Smolyansky, Michael

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 US 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.

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  • Smolyansky, Michael, 2019. "Policy externalities and banking integration," Journal of Financial Economics, Elsevier, vol. 132(3), pages 118-139.
    • Handle: RePEc:eee:jfinec:v:132:y:2019:i:3:p:118-139
    DOI: 10.1016/j.jfineco.2018.11.001
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    More about this item

    Keywords

    Banks; Credit supply; Policy arbitrage; Small business lending; Taxation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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