Publications
Publications
- 2024
Capital Market Integration and Growth across the United States
By: Leonardo D'Amico and Maxim Alekseev
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, measured as the narrowing of regional differences in bank lending rates. We explain this pattern in a framework in which external capital markets are frictional and regulation restricts banks from using internal ones 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 erodes differences across states in banks' financing costs and, in turn, in lending rates. We nest our banking model in a quantitative dynamic spatial model and show that financial integration explains up to a fifth of the rise of the American South and West and decline of the Northern financial centers of those years. We also show that deregulation aimed at integrating capital markets might have substantially larger effects than previously thought. Estimates of these effects mostly come from the post-1982 US interstate branching deregulation, but this episode occurred after an exceptionally high-rate environment where market forces had already generated substantial integration.
Keywords
Citation
D'Amico, Leonardo, and Maxim Alekseev. "Capital Market Integration and Growth across the United States." Working Paper, October 2024.