Header

UZH-Logo

Maintenance Infos

Softening the blow: U.S. state-level banking deregulation and sectoral reallocation after the China trade shock


Hoffmann, Mathias; Ruslanova, Lilia (2020). Softening the blow: U.S. state-level banking deregulation and sectoral reallocation after the China trade shock. Working paper series / Department of Economics 365, University of Zurich.

Abstract

U.S. state-level banking deregulation during the 1980’s mitigated the impact of the China trade shock (CTS) on local economies (states and commuting zones) a decade later, in the 1990s. Local economies, where local banking markets opened up earlier, were also effectively financially more integrated by the 1990’s and saw smaller declines in house prices, wages, and income following the CTS. We explain this pattern in a theoretical model that emphasizes the stabilizing effect of financial integration on demand for housing and on housing prices: faced with an adverse shock to their region’s terms-of-trade (i.e. the CTS), households in more open states can more easily access credit to smooth consumption. This stabilizes consumer demand for housing, keeps the relative price of housing up, stabilizes wages in the non-tradable sector and thus facilitates the sectoral reallocation of labor away from import-exposed manufacturing towards the housing sector. This in turn stabilizes income and consumption. We corroborate these predictions of our model in state- and commuting zone level data. Then, using granular bank-county-level data, we show that household consumption smoothing in response to the CTS was easier in financially open areas, because geographically diversified banks were more elastic in their lending response to household’s increased demand for credit. Our findings highlight the importance of household access to finance in the adjustment to asymmetric terms-of-trade shocks in monetary unions.

Abstract

U.S. state-level banking deregulation during the 1980’s mitigated the impact of the China trade shock (CTS) on local economies (states and commuting zones) a decade later, in the 1990s. Local economies, where local banking markets opened up earlier, were also effectively financially more integrated by the 1990’s and saw smaller declines in house prices, wages, and income following the CTS. We explain this pattern in a theoretical model that emphasizes the stabilizing effect of financial integration on demand for housing and on housing prices: faced with an adverse shock to their region’s terms-of-trade (i.e. the CTS), households in more open states can more easily access credit to smooth consumption. This stabilizes consumer demand for housing, keeps the relative price of housing up, stabilizes wages in the non-tradable sector and thus facilitates the sectoral reallocation of labor away from import-exposed manufacturing towards the housing sector. This in turn stabilizes income and consumption. We corroborate these predictions of our model in state- and commuting zone level data. Then, using granular bank-county-level data, we show that household consumption smoothing in response to the CTS was easier in financially open areas, because geographically diversified banks were more elastic in their lending response to household’s increased demand for credit. Our findings highlight the importance of household access to finance in the adjustment to asymmetric terms-of-trade shocks in monetary unions.

Statistics

Downloads

15 downloads since deposited on 30 Sep 2020
15 downloads since 12 months
Detailed statistics

Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:F16, F41, G18, G21, J20
Uncontrolled Keywords:Banking deregulation, China trade shock, sectoral reallocation, house prices, consumer access to finance
Language:English
Date:September 2020
Deposited On:30 Sep 2020 15:22
Last Modified:30 Sep 2020 15:27
Series Name:Working paper series / Department of Economics
Number of Pages:48
ISSN:1664-705X
OA Status:Green
Official URL:https://www.econ.uzh.ch/en/research/workingpapers.html?paper-id=1047

Download

Green Open Access

Download PDF  'Softening the blow: U.S. state-level banking deregulation and sectoral reallocation after the China trade shock'.
Preview
Content: Published Version
Language: English
Filetype: PDF
Size: 681kB