Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/322029 
Year of Publication: 
2025
Series/Report no.: 
ECB Working Paper No. 3019
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
This paper investigates the role of banking networks in the transmission of shocks across borders. Combining banking deregulation in the US with state-level idiosyncratic demand shocks, we show that geographically diversified banks reallocate funds from economies experiencing negative shocks to unaffected regions. Our findings indicate that in the presence of idiosyncratic shocks, financial integration reduces business cycle comovement and synchronizes consumption patterns. Our findings contribute to explaining the Great Moderation and provide empirical support for theories that predict that banking integration facilitates the insurance of region-specific risk and the efficient allocation of resources as markets become more complete.
Subjects: 
Financial integration
business cycles
economic growth
idiosyncratic shocks
Great Moderation
regional economics
JEL: 
E32
F36
G21
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-7106-5
Document Type: 
Working Paper

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