Softening the Blow of the China Trade Shock — and lessons for EMU in the times of COVID19

My new paper with Lilia Ruslanova: Softening the Blow: U.S. State-Level Banking Deregulation and Sectoral Reallocation after the China Trade Shock is now online as UZH discussion paper.
The upshot: U.S. state-level banking deregulation during the 1980s  considerably dampened the fallout on local economies of the China trade shock a decade later. The reason: households in financially integrated areas could more easily borrow against their housing wealth to smooth consumption. This kept house prices and wages in the non-tradable sector up, facilitating labor reallocation away from manufacturing.

The paper has a a clear take-away for European policy makers in the time of COVID19: the pandemic is likely to be a major reallocation shock, similar to the China Trade Shock, with very heterogeneous effects across regional economies in Europe. But,as our results show, for efficient reallocation to take place, household-level access to finance is paramount. However, cross-border retail financial integration in the EMU basically does not exist because banking integration is still superficial and fragile. Therefore, even in the current situation, EMU policymakers’ homework remains the same: complete the banking union, get an EDIS done, encourage cross-border banking consolidation …