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Graduate Student Research Workshop

Financial Integration and the Geography of Economic Activity


October 18, 2024
3:00pm - 4:30pm
Goldman Room, Adolphus Busch Hall Directions

Graduate Student Research Workshop

Financial Integration and the Geography of Economic Activity


October 18, 2024
3:00pm - 4:30pm
Goldman Room, Adolphus Busch Hall Directions
October 18, 2024
3:00pm - 4:30pm
Goldman Room, Adolphus Busch Hall Directions

How do regional differences in interest rates within a country evolve, and how do these differences shape the location of economic activity? CES Graduate Student Affiliate Leonardo D'Amico and Maxim Alekseev have digitized state-level banking data from 1953 to 1983 and document that regional differences in bank lending rates ("regional spreads'') narrow faster when nominal short rates are high. To understand this pattern, they developed a framework where banks are restricted by regulation from moving funds across regions (e.g. because inter-regional branching is prohibited) and face frictions in accessing national financial markets. This generates regional spreads that depend on the mismatch between households' local supply of savings and firms' local loan demand. When nominal short rates are low, spreads persist because households hold more of their wealth locally, in the form of non-interest-bearing bank deposits. In contrast, high nominal rates erode the benefit of holding deposits and lead households to move their savings to national markets (e.g. via money-market funds), which equalizes banks' financing conditions across regions and, in turn, lending rates. They then embedded their banking model in a quantitative dynamic spatial model and show that the financial integration they documented explains almost half of the rise of the American South and West that they observe in the data, and a quarter of the demise of the Northern financial centers. High nominal rate environments can thus affect the location of economic activity, uncovering a new geographic channel of monetary policy. D'Amico and Alekseev also show that the literature studying the U.S. interstate branching deregulation of 1982 may significantly understate the effects of deregulation more broadly, because that episode occurred in an exceptionally high-rate environment after market forces already generated substantial financial integration.

About

The Graduate Student Research Workshop is a seminar for graduate students at Harvard University and MIT to present their research to peers and faculty with an interest in European studies. This student-run, student-centered workshop welcomes presenters at any stage of their research from any social science discipline.

To join the seminar mailing list, please contact the seminar chairs. Papers will be distributed to participants via email in advance, and the schedule of upcoming workshops will be updated here throughout the academic year.

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