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 …
Mathias Hoffmann is Professor at the Department of Economics at the University of Zurich. His research focuses on the macroeconomic aspects of international financial integration and on the link between financial markets and the macro-economy more generally. His recent published articles include papers on the determinants of international capital flows and imbalances, the international transmission of business cycles, on international risk sharing, banking regulation, and housing markets. Prior to arriving in Zurich, he was Professor at the University of Dortmund in Germany and a Lecturer at Southampton University (UK). He holds a PhD in Economics from the European University Institute in Florence and obtained his undergraduate education in economics and mathematics at WHU School of Management, Brandeis University and the University of Bonn.
Mathias Hoffmann is affiliated with the University of Zurich’s research priority program in financial regulation (URPPP FinREG), a fellow of CESifo Munich and of the Centre for Applied Macroeconomic Analysis (CAMA) at the Australian National University, and has held visiting positions at the University of California at Berkeley, the Deutsche Bundesbank, the Bank of Finland, the Hong Kong Monetary Authority, the Bank for International Settlements, Norges Bank, Keio University and Stanford University.