An Empirical Test of the Interaction Between Regional Financial Markets and Regional Growth
The Review of Regional Studies
Abstrac'-Two models of the inca-action between n:gional fuwlcial markets and regional production are examined. The fD"st uswnea that n:gional expenditures are determined by the regional intezeat rate, malogous to national IS-LM macroeconomic models. The second uswnes that n:gional expenditures 1re c:anatrlinod by the availability of regional credit available through fmancial nwkets. The first model implies regional financial markets have no effect on n:gional growth if financial capital is
... ctly mobile. However, the second model indicates regional growth is affected by regional fuwtcial markets. This difference is tested using gross product and commercial bUlk loan data for states from 1965 to 1985. A two-step procedure is used that (1) estimates the structural coefficients for each state through time series analysis, then (2) tests the explanatory power of these coefficients in a cross-section analysis of state growth rates. This analysis indicates that regional financial markets exhibit a positive impact on regional growth. Analyses of regional financial marlc.ets by Moore and Hill (1982) , Dow (1987) , and Harrigan and McGregor (1987) suggest, contrary to conventional assumptions, that imperfect mobility of financial capital places constraints on the growth of regional economies. This is in contrast to most regional analyses that assume fmancial capital is extremely, if not perfectly, mobile among regions. 1be assumption of perfectly mobile fmancial capital implies that less mobile physical capital, natural resources, and labor are more important constraints to regional growth and thus more deserving of study. Recent trends in bank closings in the United States provide insight into the question of financial capital mobility. Between 1982 and 1988, 807 banks were closed by the Federal Deposit Insurance Corporation in the 50 states. 1 Texas led the way with 217 bank closings, followed by Oklahoma with 92 and Kansas with 50. These three states, contiguously located in the south central plains, accounted for 44.5 percent of the total. In contrast, there were 10 states, primarily located in the east, that experienced no bank closings during this period.