A model of the interaction between regional financial markets and regional growth

Regional

Science and Urban

Economics

23 (1993) 85-l 10. North-Holland

A model of the interaction between regional financial markets and regional growth Orley M. Amos, Jr. and John R. Wingender” Oklahoma State Universify, Stillwater, OK 74078-0555, USA Received January

1990, final version

received

May 1991

Building on Harrigan and McGregor’s (Journal of Regional Science, 1987, 27, 357-367) general model of regional financial markets and Moore, Karaska and Hill’s (Journal qf Regional Science, 1985, 19, 29-35) Keynesian-type model of regional income, this analysis presents a model of the relationship between regional tinancial markets and regional income. Two version of the model are examined, one based on interest-rate-induced regional expenditures and the other on creditinduced expenditures. An empirical test suggests the credit-induced version of the model better reflects regional growth.

1. Introduction One area that has received little attention in the ongoing concern over unbalanced regional growth is the role played by regional financial activity. This is partly due to the common assumption that financial capital is perfectly mobile among regions and thus plays a passive role in regional growth. Recent analyses of regional financial markets by Moore and Hill (1992), Dow (1987), and Harrigan and McGregor (1987) suggest that financial capital is not perfectly mobile, generating questions concerning the influence of regional financial activity on regional growth. Moore et al. (1985) made progress in attempting to address these questions by deriving a Keynesian-type regional income multiplier that includes regional financial activity, indicating the interactive nature of regional income and financial activity. However, their analysis concentrates on the supply of regional credit Correspondence to: O.M. Amos, Jr., Department of Economics, College of Business Administration, Oklahoma State University, Stillwater, OK 74078-0555, USA. *An earlier version of this analysis was presented at the Southern Regional Science Association Meetings, Morgantown, West Virginia, 15 April 1988. This study was undertaken in cooperation with the Southwest Regional Development Center, College of Business Administration, Oklahoma State University. The authors wish to express appreciation to Tim Ireland, Janice Jadlow, Ron Moomaw and anonymous reviewers for helpful comments. 016~62/93/$06.00

0

1993-Elsevier

Science Publishers

B.V. All rights reserved

86

O.M.

Amos. Jr. cd

J.R. Wingender,

Re~ionalfinancial

tnurkefs

and does not consider recent models of regional financial markets such as those developed by Harrigan and McGregor (1987) and Dow (1987). The objective of this paper is to consider the contribution regional financial activity makes to regional growth. More specifically, this analysis builds on the work of regional income presented by Moore et al. (1985) that considers an extended model of regional financial markets. In so doing, this analysis provides a basis for determining the importance of regionally segmented financial markets to regional growth. 2. Unbalanced regional growth The study of unbalanced regional growth has been an integral part of regional economics for several decades with notable contributions by Perroux (1955) Kaldor (1957) Myrdal (1957), Hirschman (1958), Williamson (1965) Hansen (1967), and Lasuen (1969). Two basic effects in an explanation of unbalanced growth are ‘polarization’ and ‘trickling down’ effects [Hirschman (1958)] or ‘backwash’ and ‘spread’ effects [Myrdal (1957)]. The polarization-backwash effect indicates that one region experiences cumulative growth at the expense of other regions and the trickling down-spread effect indicates that growth in one region promotes growth in others. Although Perroux (1955) Hirschman (1958). Hansen (1967), and Lasuen (1969) argue that that polarization-backwash effect is eventually overwhelmed by the trickling down-spread effect, indicating that growth in one region will promote growth in other regions, Myrdal (1957), Kaldor (1957, 1970) and Dixon and Thirlwall (1975) question this proposition. The polarization-backwash effect follows from agglomeration economies or increasing returns to scale in one region generating higher returns to the factors of production. Higher factors returns attract labor and capital from less productive regions, which further enhances productivity in the receiving region and inhibits productivity in the sending region. More productive regions cumulatively expand and less productive regions cumulatively decline. The key questions posed by this analysis is whether financial activity plays a passive or active role in unbalanced regional growth attributed to the polarizationbackwash and trickling down-spread effects. In a study addressing the passive nature of national financial resources, Agu (1986) indicates that frlnancial institutions can be either demand-following or supply-leading, the former characterized by financial activity that passively responds to development stimulated by other factors, and the latter characterized by development that is directly stimulated through the financial sector. Agu concludes that financial activity in Nigeria is demand-following, but indicates that structural changes could generate a supply-leading situation. If financial activity plays an active role in economic development and is regionally

O.M.

Amos, Jr. and J.R. Wingender,

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87

differentiated, then it can also contribute to unbalanced regional growth. The potential importance of regionally differentiated financial activity to regional growth, which lies at the heart of regional financial market analyses, is the cornerstone of this analysis.

3. Regional financial markets Beare (1976) Fishkind ( 1977), Roberts and Fishkind (1979) Moore and Hill (1982), and Dow (1987) are five key studies of regional financial activity that either consider the regional impact of national monetary policy or provide a formal analysis of regional financial markets. Although both Beare and Fishkind assume perfectly mobile financial capital in their analyses of national monetary policy, Roberts and Fishkind emphasize financial capital immobility and the spatial dimension of financial activity. Moore and Hill use a standard money multiplier analysis to indicate how regional income and the demand for financial deposits determine the supply of regional credit. Dow reinterprets Moore and Hill’s model by reversing the direction of causality between income and deposits, arguing that the amount of regional credit demanded determines the amount of deposits needed for a given level of income. Four important implications are obtained from these analyses. First, financial capital is not necessarily perfectly mobile. As a result, financial activity is spatially segmented and interest rates are not necessarily equalized capital is not perfectly immobile either. among regions. Second, financial There is interaction between regional and national financial markets; excess regional demand is met by national markets and excess regional supply is invested in national markets. Third, there is a distinction between locallyoriented credit demand and nationally-oriented credit demand. Locallyoriented credit demand is the demand of regional firms and households that do not have ready access to funds from national financial markets. Nationally-oriented credit demand is demand of regional firms that can be met from national markets. Fourth, there is a recognition of the importance of regional income in financial activity. The interactive relationship between the two, however, has not been completely addressed and leads to the extension of these models presented in this research. 3.1. The Hurrigun und McGregor

model

Harrigan and McGregor (1987) present a general model of regional financial markets which allows for the polar cases of regional financial activity: (i) complete market segmentation and (ii) perfect financial capital mobility. The Harrigan-McGregor (H-M) model links the regional financial market and the national financial market through a band around the

88

O.M. Amos, Jr. and J.R.

Wingender,

Regional financial

s

CR&,

7

D,

markets

CR

Fig. 1

national interest rate within which the regional interest rate fluctuates with no arbitrage between the two markets. If the regional interest rate rises to the upper portion of the band, supply becomes perfectly elastic at an interest rate equal to the national interest rate plus an arbitrage surcharge. The region can tap into a virtually unlimited source of credit from the national financial market. If the regional interest rate falls to the lower portion of the band, demand becomes perfectly elastic at an interest rate equal to the national interest rate minus an arbitrage surcharge and regional funds can be invested in the national market. Within the interest rate band both demand and supply are sensitive to the regional interest rate and the regional financial market is completely segmented from the national market with regional demand satisfied exclusively by regional supply. Fig. 1 summarizes the primary features of the H-M model. Both demand and supply curves exhibit perfectly elastic ranges and ranges that are sensitive to the interest rate. The perfectly elastic range of the supply curve sets in at point A where the regional interest rate is equal to the national interest rate plus an arbitrage surcharge. The perfectly elastic range of the demand curve sets in at point B where the regional interest rate is equal to the national interest rate minus an arbitrage surcharge. Within the band delineated by the perfectly elastic demand and supply curves, the regional financial market is segmented from the national market. The regional interest rate is i, and the credit exchanged in the market, CR,, is between regional participants.

O.M. Amos, Jr. and J.R. Wingender,

Regionalfinancial

markets

89

If equilibrium is in the perfectly elastic range of either curve, then interaction occurs between the regional and national financial markets. In the perfectly elastic range of the supply curve, the supply of credit originating within the region is S,, with excess demand satisfied from the national financial market at the national interest rate plus the arbitrage surcharge. In the perfectly elastic range of the demand curve, the regional demand for credit is limited to D,, with the excess supply of regional credit sent to the national financial market at the national interest rate minus the arbitrage surcharge. Given a positive arbitrage surcharge, the regional financial market cannot borrow from, and lend to, the national financial market at the same time. Funds either flow into, or out of, the region.’ Funds flow into the region only when the regional financial market is in the perfectly elastic segment of the supply curve, and flow out only in the perfectly elastic segment of the demand curve. The lack of simultaneous credit flows between the national and regional financial markets is a problem in the H-M model. Realistically, locallyoriented credit demanders are likely to access national sources of supply (e.g. new car loans and credit cards) at the same time locally-oriented credit suppliers place funds in the national markets (e.g. mutual funds and money market accounts). The H-M model, by generating only three mutually exclusive alternatives, (i) complete market segmentation, (ii) funds flowing to the national market, or (iii) funds coming from the national market, presents a useful, but overly simplistic model of the process. It is argued here that interaction between the regional and national markets is not necessarily a perfectly elastic relationship for either supply or demand at the national interest rate plus or minus the arbitrage surcharge. A larger regionalnational interest rate differential is likely to induce an increased flow of credit in the same way that larger wage differentials induce increased flows of labor.’ 3.2. The Moore,

Kuruska

Extending the earlier examine the interaction

und Hill model

work of Moore and Hill (1982), Moore et al. (1985) between regional finance and income by deriving a

‘This only applies to locally-oriented credit demand. Since nationally-oriented credit demand participates directly in the national tinancial market it is possible that the excess supply of regional credit is invested in the national market at the same time nationally-oriented demand obtains credit from the national market. ‘This is further indicated by the hierarchy of financial markets coincident with the hierarchy of urban areas. Banks and financial intermediaries in small communities are likely to interact first with larger in-state banks through correspondent banking relationships, prior to directly or indirectly accessing larger out-of-state or national financial centers. While this process is realistically reflected in a different arbitrage surcharge for different financial centers, it can also be indicated by the relative regional-‘national’ interest rate differential, with a greater differential inducing increased interaction higher up the hierarchy.

90

O.M. Amos, Jr. and J.R. Wingender,

Regional financial

markets

Keynesian-type regional income multiplier that incorporates the relationship between regional income and the supply of regional credit. The supply of regional credit, by augmenting regional consumption expenditures, generates a greater regional income multiplier than traditionally identified. The Moore et al. (M-K-H) study is primarily concerned with the derivation of a regional income multiplier that includes the financial dimension. In so doing it identifies the mutual interaction between the income and credit, which provides an important foundation for the analysis undertaken here. While regional credit demund is acknowledged in the M-K-H model, the relationship specifying the effect of regional income on regional credit is based on regional credit supply. Changes in regional income, through changes in regional deposits, also change regional credit supply. Unlike the H-M model of regional financial markets, there is no explicit consideration of regional credit demand in the M-K-H model. Although a change in regional income will clearly affect the amount of regional credit supplied, it also affects the amount of regional credit demanded. The objective of this analysis is to build on the M-K-H analysis of regional income and credit interaction by considering a more complete model of regional financial markets. This analysis is then used to highlight the role regional financial markets play in regional growth. 4. An analysis of regional financial markets and regional income This analysis of the interaction between regional financial markets and regional income explores two alternatives characterized by the manner in which financial activity influences the regional demand for production. The first alternative is a modified IS-LM analysis in which the regional interest rate is the critical variable influencing regional expenditures. The second alternative explores the consequences of assuming that the net availability of regional credit constrains or otherwise influences regional expenditures. Although the former identifies the general interactive mechanism between regional financial and production activities, the latter is offered as a potential explanation of extraordinary periods of regional growth or decline. The difference between these two alternatives provides a critical understanding of the fundamental operation of regional economies. In the first alternative, regional financial markets contribute to regional production activity through the regional interest rate. Relative regional interest rates, acting like any prices, ration and distribute funds across regional economies subject to transactions costs. In this case, regional financial markets act as a passive mechanism that is driven by regional production activity. In the second alternative, the availability of credit directly affects regional production activity, with limited credit constraining production and additional

O.M. Amos, Jr. and J.R. Wingender,

credit promoting directly stimulated

4.1.

Interest

rute

Regional,financial

production. This implies regional by an increase in regional credit.

induced

model

(version

markets

production

91

can

be

I)

The first version of the model is a modified IS-LM analysis, divided into a regional financial market submodel, which builds on the H-M analysis, and a Keynesian-type regional income submodel, which builds on the M-K-H analysis. Eqs. (l)-(7) specify version 1 of the model. Regional finuncial

murket .&model:

CRf=L6,i,+6,Y,+v[(in-p)-i,],

(1)

CRf=&o,i,+cr,Y,+s[i,-(i”+,u)],

(2)

CR; = CR;.

(3)

Regional production

submodel (version I):

C,=x+B, Yt-l--Bzi,,

(4)

I,=-)‘+K,

(5)

M,=cp+u,

Y,_,-KZir,

Y,_ 1-w2it,

Y,=C,+I,+X,-M,,

(6)

(7)

where CR:= total regional demand for credit, including demand originating from regional and national sources; CR”= total regional supply of credit, including supply originating from regional and national sources; i, = regional interest rate; i” = national interest rate; Y, = regional income; C, = regional expenditures; 1, = regional investment expenditures; X, = consumption regional exports; M, = regional imports; and t = time. The key parameters of the model are the effect of the regional interest rate (6,) and income (6,) on regional sources of credit demand, the effect of the regional interest rate (a,) and income (az) on regional sources of credit supply, the effect of the differential between regional and national interest rates on national sources of credit demand (v) and credit supply (r), the arbitrage surcharge between national and regional financial markets (p), the marginal propensities to consumer (pr), invest (K~), and import (or), and the induced effect of the regional interest rate on consumption (Bz), investment (K~), and imports (wz). These parameters are all assumed to be positive. The intercept terms (2, 4, CI,y, and cp) have no such constraint.

92

O.M. Amos, Jr. and J.R. Wingender,

Regionalfinancial

markets

Eqs. (1) and (2) are, respectively, total regional credit demand and supply. Each equation combines credit demand or supply originating within the regional with national sources. The second and third terms in eq. (1) (-6, i,+ 6, Y,) capture the sensitivity of regional credit demand to the regional interest rate (6,) and income (6,). The third term indicates the sensitivity of the national demand for regional credit to the differential between the national and regional interest rates, less an arbitrage surcharge (v[(i” - p) - i,]). A similar interpretation exists for eq. (2) except the interest rate coefficient (cr) is positive and the arbitrage surcharge (11) is added to the national interest rate. The income coefficient for credit supply (02) summarizes the income-deposit-credit mechanism utilized in the M-K-H analysis, which identities the amount of regional deposits and credit available at different levels of regional income. The specification of eqs. (l)-(3) captures the salient features of the H-M model of regional financial markets while allowing for a more general representation of the process. In contrast to the three distinct, mutually exclusive alternatives in the H-M model, (i) complete segmentation, (ii) flow of funds to the national market, and (iii) flow of funds from the national market, this model realistically allows for the simultaneous flow of funds to and from the national market depending on the values of IL, 4, v, T, p, i”, and i,. Exogenous credit demand and supply contained in the intercept terms (A and 4) include national credit flows independent of the interest rate differential. Positive values for both are consistent with the simultaneous flow of funds to and from the national market as the regional financial intermediaries diversify both assets and liabilities between national and regional alternatives. Changes in the interest rate differential induce changes in the regional-national interaction.” Although this model includes an arbitrage surcharge (p), unlike the H-M model it does not constrain the credit demand and supply curves to perfectly elastic segments determined by i” i p. This specification allows for increased interaction betweeen regional and national markets with larger interest rate differentials, the extent of which depends on I’ and r. Perfect elasticity is possible within this framework if 11and r are endogenized.4 The arbitrage surcharge (p), although assumed to be constant for this analysis, realistically captures several aspects of the interaction between regional and national financial markets that vary across regions. One “The intercept terms (2 and 6) can be divided into regional and national components (2 = I., + I2 and (i, = 4, + c/j2),where the tirst terms indicate exogenous regional credit demand and supply and the second terms indicate exogenous national credit demand and supply for the region. Although i., and 4, may be positive or negative, 1, and 42 are both assumed to be positive. Changes in the regional-national interest rate differential, through Y and r, then add to or substract from the exogenous amounts. “The perfectly elastic segments of credit demand and supply in the H-M model are also achieved if non-linear functional forms for t’[(i”-p)-i,] and r[i,-(i”+p)] are used.

O.M. Amos, Jr. and J.R. Wingender, Regionalfinancial markets

93

obvious component of ~1is the transaction cost of transferring funds between regions, including the cost of telephone calls and the necessary computer time. This cost is minimal in most cases, especially with well-established links between regional and national financial markets. However, some smaller regional financial markets, such as those centered on rural community banks, may incur greater expenses in the acquisition of funds from the national markets. Smaller regional financial markets may incur the costs of establishing links with the national market through expensive face-to-face contact or compensating balances with correspondent banks. Although p is assumed equal for both credit demand and supply, some asymmetry is likely to exist for smaller banks. While excess funds can be easily transferred to national financial markets through various credit instruments, such as Treasury bills and commercial paper, the acquisition of funds may be more difficult. Another component of p is a risk premium, based on the diversity of the region’s output, historical instability of the region, and expectations of future conditions in the region. Like the transactions cost component of p, the risk premium is likely to be asymmetric for some regions. While the risk premium is unlikely to affect p when funds flow from the regional financial market to the national financial market on the demand side, it is an important factor when the region attempts to obtain funds from the national market on the supply side. To simplify the ensuing analyses, eqs. (1) and (2) are rewritten:

(14 (24 This specification indicates that the regional interest rate (i,) affects demand or supply directly through regional channels (6, and a,) and indirectly through the national market (v and r). For example, while an increase in the regional interest rate reduces regional credit demand directly, it also has an indirect constraining effect as it increases relative to the national interest rate. The national interest rate, after compensating for the arbitrage surcharge (CL), is directly related to credit demand (+v) and inversely related to credit supply ( - 4. Fig. 2 presents the regional financial market generated by eqs. (1)+3). Curves D’ and s’ represent the regional sources of credit demand and supply, while D and S represent the combined regional and national sources. D’ and D intersect where i= in-p, and S’ and S intersect where i= i”+p. The slopes of D and S are 6, + v and g1 + r, respectively. At the equilibrium interest rate (i,J, v[(i” -p)-i]
O.M. Amos, Jr. und J.R. Wingender,

94

Regional,financial

CR,

markets

CR

Fig. 2

exogenous components of national sources of credit demand and supply (& and 42) and the interest-rate-induced flows (v[(i” -p) - i] and r[i -(in + I*)]). Eqs. (4)-(7) present a simple Keynesian-type fixed price expenditures model, similar to that utilized in the M-K-H model. The key differences are the lagged structure of the expenditure-income relationship for consumption, investment, and imports, and inclusion of an interest rate inducement effect for each of the expenditures. Lagged income in eqs. (4))(6) indicate that the financial submodel in eqs. (l)-(3) adjusts more rapidly than the production submodeL The negative signs preceding flZ, tiZ, and w2 indicate the traditional IS-LM interest rate inducement mechanism. Eqs. (la), (2a), and (3) can be solved for i, in terms of Y,, exogenous variables, and parameters of the model. Substituting eqs. (la) and (2a) into (3) gives ~+(a,+r)i,+a,Y,-z(i”+~)=i.-(6,+v)i,+6,Y,+v(in--). Simplifying

‘A more production, feature that extension is

and solving

(8)

for i, generates

complete model of the regional process would include the supply side of regional in which regional investment generates added regional production capacity, a is only partially captured in eq. (5). Although clearly a worthwhile undertaking, this beyond the scope of the current analysis.

O.M. Amos, Jr. and J.R. WinRender. Regionalfinancial

markets

95

i,=[l/(d,+v+a,+5)][2-$+v(i”-p) +r(i”

+p)+(6,-a,)Y,].

(9)

Eq. (9) indicates that the equilibrium regional interest rate is dependent on the various parameters of the model, the national interest rate, and regional income with respect to the relative values of 6, and I-J~.The latter term in eq. (9) is particularly important in the context of regional growth. The overall impact of income on the regional interest rate is determined by the relative values of 6, and g2. If (5,>0,, the regional interest rate rises as regional income increases, and if 6, < 02, the regional interest rate falls. Eqs. (4)+7) can be solved for Y, in terms of i,, exogenous variables, and the parameters of the model. Repeated substitution into eq. (7) generates

Simplifying

gives

Y,=(x+?;--+xX,)+(B1+K,-81)Y~-

1-(f12+Kz-O&t.

(11)

Eq. (11) indicates, based on the expression -(/3,+K2-w2)ir, that an increase in the regional interest rate decreases regional income. Taken together, eqs. (9) and (1 I) anticipate the results obtained below. Regional income is cumulatively stimulated through reductions in the regional interest rate, which occur if is2 02, where credit demanders are more sensitive to changes in income than credit suppliers (i.e. demand for credit increases faster than the supply in a growing regional economy), then an increase in income leads to an increase in the regional interest rate. The increase in the regional interest rate then inhibits regional expenditures and production. Combining eqs. (9) and (11) generates first-order difference equations which can be used to identify conditions for alternative regional growth paths. Substituting eq. (9) into eq. (11) gives

(12) Combining

terms simplifies

eq. (12) to

96

O.M. Amos, Jr. and J.R. Wingender,

Eq. (14) is a first-order

difference

equation

Regional financial

markets

of the form

Y,=fl,+O,Y,_,,

(14)

where IT,= “+Y-~+xX,-[(B~+Kz-0~)/(6~+V+al+~)][~~~+v(i”-~)+z(i”+~)]

l+(P2+~2-w2)C(~2-~2)/(61+v+~1+~)1 (13 and 0, = ~~_____.

B1+

KI--01

1+(~2+K2-W2)[(~2-~2)/(61

The solution

(16) +“+o,

+z)l’

to eq. (14) is given by6 (17)

The stability of eq. (14) is determined by 0,. If 0, = - 1, the growth path of Y, oscillates at a constant amplitude; if - 1 < 0, 1 or 0,~ 1 and will be the primary topic of this discussion.

O.M. Amos, Jr. and J.R. Wingender,

unless the regional

Regional financial

markets

97

economy is experiencing an extraordinary period of growth attributable to agglomeration economies and/or increasing returns to scale. The denominator of eq. (16) includes three terms that capture the indirect multiplicative effect of income operating through the regional financial market. The first term (/?2+~2-w2) indicates the combined effect of interest rate changes on income through the stimulation of consumption, investment, and imports. As with the marginal expenditure propensities in the numerator, regions heavily reliant on imports could generate a negative value for this term, but in general this term is expected to be positive. The second term (l/(6, + v +o, +r)) indicates the combined effect of changes in credit on the interest rate and, given that all parameters are positive, is expected to be positive and less than one. Given that z and v are constant, the critical term in eq. (16) determining both the sign of 0, and its magnitude relative to one, is S,-(r,, the differential effect of regional income on credit demand and supply. If S2 > c2, the denominator of 0, is positive (assuming a relatively small value for w2) and greater than one. In this case (assuming a relatively small value for w,), the ratio of the numerator and denominator is positive and less than one, indicating a dampening or decelerating growth path converging toward the constant term n,/( 1 - 0,). Exogenous shocks triggered by constant terms or parameters contained in U, generate a period of growth or decline, converging toward the new level, a process that is entirely reasonable and often observed in regional economies. However, if 6, < g2, where income has a greater impact on credit supply than on credit demand, several interesting possibilities result. Given a the denominator of eq. (16) is less than one and negative value for 6,-o,, potentially negative, depending on the relative values of the parameters. If the denominator is positive but less than one and less than the numerator, then O,> 1 and the regional economy has explosive growth. The key triggering mechanism in this alternative is the declining interest rate which stimulates consumption and investment expenditures. While this alternative can happen, and perhaps has happened in the past, lower limits on the interest rate are likely to prevent extended periods of explosive growth in this manner. If 6,>a,, generating a negative value for the denominator, it is possible that 63~0, leading to an oscillating pattern of regional growth that could be either explosive of converging. Although r and v are assumed to be constant, if they are endogenized, approaching infinity for larger values of credit as suggested by the H-M model, then l/(6 1+ v + o1 + z) approaches 0, indicating that the denominator of 0, approaches one and 0, approaches /?i + icl -wi. This result, in the case of capital mobility, clearly implies that regional financial activity has no effect on regional income, with all stimulation coming directly from the traditional income induced expenditure effect (/Ii + K1-ml).

While it is not possible to determine a priori the values of O,, it is likely that financial market activities can alter the growth caused solely by multiplicative income effects, unless credit demand and supply are perfectly elastic. It is possible that differential patterns of unbalanced regional growth can be explained by the relative parameter values between different regions. The backwash-polarization and trickling down-spread effects can be interpreted as changes in the parameter values in eq. (16). Structural changes related to the polarization-backwash effect, causing differential changes in the marginal expenditure propensities in leading and lagging regions, could generate accelerating and decelerating growth, respectively. The trickling down-spread effect would be seen as a reversal of these structural changes and corresponding changes in the parameters. Although these structural changes are seen in the numerator of eq. (16), similar financial structural changes seen in the denominator could reinforce this process. The impact of income on the supply of credit is likely to be greater in the leading region and less in the lagging region under the polarization-backwash effect, with the reverse true under the trickling down-spread effect, reinforcing the possibility of explosive or converging growth.

4.2. Credit constrained

mode (r!ersion 11)

An alternative view of regional financial and income interaction can be developed by exploring the implications of replacing the regional interest rate with net regional credit availability as a determinant of regional expenditures. Version I of this model is based on the proposition that the regional interest rate is the critical variable inducing regional expenditures. The role played by the regional financial market is thus one of establishing the regional interest rate that then affects borrowing and expenditure decisions by regional consumers and businesses. The alternative view of this process explored in version II of the model is that regional expenditures are based directly on the amount of credit obtained by consumers and businesses rather than the interest rate. In this case, the regional financial market plays a more direct role in the regional economy. From a policy perspective, version II suggests that regional expenditures can be directly influenced by the amount of credit in the region, rather than indirectly affected by the regional interest rate. Although the regional financial market submodel remains unchanged, the Keynesian-type production submodel is modified slightly, as indicated by eqs. (4a)47a): Regional

production C,=cc+~,Y,_

suhrnodel

,+p;CR:,

(uersion

11):

(44

O.M. Amos, Jr. and J.R. Wingender, Regionalfinancial

markets

99

Y,=C,+I,+X,-M,.

(74

The primary change in version II is substitution of the regional interest rate (i,) with the term CR:, defined as the net amount of additional credit available to the regional economy for expenditures. This specification of the model indicates that regional participants utilize two sources of funds for expenditures, income, and credit.7 In this case credit is defined as a flow rather than a stock variable, indicating the amount of borrowed funds regional households and business use, in addition to income, to undertake expenditures.* As indicated by the positive signs for each parameter (j?T, ~5, and CO”;)net credit availability has a positive impact on expenditures. The value of CRT is obtained by solving the regional financial model in eqs. (l)-(3) for the equilibrium interest rate, as indicated by eq. (9) then isolating the resulting credit demand from eq. (1) originating within the region. A truncated version of eq. (1) indicates the amount of total credit demand coming from regional sources, exclusive of national sources: CR;F=Ld,i,+d,Y,. Substituting

(lb)

eq. (9) into (1 b) generates

the following:

CR,*=].-6,[1/(6,+v+oI+z)][Lq5+v(i”-p)+z(i”+p)]

Solving equation:

eqs. (4a)-(7a)

for

regional

income

y,=(a+y-cp+X,)+(Bt+Kt-W,)Yt~ +(p;+K;--w;)CR;.

generates

the

reduced

form

1

(19)

‘Although income remains lagged in eqs. (4a)+6a), credit availability is unlagged for two reasons. First, as in version I, it is intended to capture the differential adjustment periods for production and financial activity, with the latter adjusting more rapidly than the former. Second, this specification maintains consistency with the specification of version I, allowing an easy comparison of the difference attributable to the alternative assumptions of the two versions. ‘In version I the distinction between stock and flow in the regional financial market is unimportant since the critical determinant for production is the interest rate. However, in versiuon II CR,? is the net flow of funds, or the change in corresponding stocks from one time period to the next.

100

O.M. Amos, Jr. and J.R. Wingender, Regional financial markets

Substituting eq. (18) into similar to eq. (13):

eq. (19), then

simplifying,

yields

an expression

(6,+v+o,+z)] 1-(BT+KT--Wf)[~2-~1(82-~*)/(81+V+~1+T)]]

Y,=-.

B1+KI --WI K~--~)C~~-~I(~~-~~)/(S~+~+a, The solution

+T)] 1

K-1.

(20)

to eq. (18) is given by eq. (19):

(21) where the critical

term O,, is specified

as

PI +KI

-01

@“=i-qp;+K* -ot)Cs,-sl(6,-a,)/(61 2

+v+a1 +r)l'

(22)

Although eqs. (16) and (22) are similar there are two key differences that can contribute to different growth paths. The first term in the denominator (fiz +~1; -w$) indicates the combined effect of regional credit on regional income. The minus sign indicates that larger values reduce the denominator and increase O,,. This occurs because version II of the model assumes the net availability of credit stimulates production activity, rather than the interest rate. In version I additional credit demand, by increasing the regional interest rate, inhibits regional activity. In version II additional credit demand stimulates regional activity. The second term in the denominator is also slightly different than eq. (16). However, the relative magnitudes of 6, and cr2 have the same qualitative effect on O,, as on 0,. If 6, CJ~, the value of O,, is decreased. The primary difference between eqs. (16) and (22) in this respect is whether ~5~c~. The difference between versions I and II is also seen by endogenizing 5 and v. In version I, if T and v approach infinity with increases in credit, then indicating regional financial activity has no 0, approaches fil+~l-~l, effect on regional growth. However, in version II, if z and v approach infinity, then O,, approaches (fl, +~~-co~)/[l -((/~Z+K;-0~)6,]. Not only is the role of regional financial activity readily apparent, but the potential for

O.M. Amos, Jr. and J.R. Wingender, Regionalfinancial

markets

101

explosive growth remains. In other words, unlike version I, even perfectly elastic regional credit demand and supply does not eliminate the role of the regional financial market in regional production. If regional expenditures are stimulated by the availability of regional credit, rather than the regional interest rate, the analysis presented in version II of the model exhibits important implications. A regional economy is more likely to have periods of explosive growth or decline triggered by exogenous shocks in version II of the model than in version I. If regional participants are induced by changes in the regional interest rate, their expenditures are more likely to stabilize as the region either grows or declines. However, if they are induced by the availability of credit, growth or decline is potentially explosive, as expenditures cumulatively reinforce regional income and credit in an upward or downward spiral. 5. Interpretation of the results Perfect (or near perfect) financial capital mobility implies that the availability of credit is not important to the differential growth of regions. Regional interest rates play the key role in this process. Regions that demand relatively more credit, and thus are willing and able to pay higher interest rates, attract funds from other regions (i.e. through the national financial market). However, higher interest rates inhibit regional expenditures and thus dampen regional growth. Exogenously induced expansion in a region tends toward a stable growth path. There are reasons not only to question the near perfect mobility of financial capital, but also to reconsider the mechanism that relates regional financial markets and production activity. Many institutional aspects of the banking system generate impediments to the free flow of funds among regions. One factor is state branch banking regulations. Nearly half of the states allow state-wide branch banking. This not only allows greater mobility among branches within each state, it also allows larger banking entities that can more readily interact with the national financial market. Under statewide banking even a small rural branch has easy access to funds at the national level. However, half of the states have limited branch banking or unit banking regulations. Greater restrictions on branch banking would tend to limit the access of smaller banks to national markets by increasing transactions costs (p) or by placing funds out of reach of the regional financial markets due to the lack of established linkages to the national market. Another important institutional factor is the various state and federal regulations governing banking operations. For example, capital-asset and deposit-reserve requirements might prevent banks from obtaining funds from national markets, even though they (and their customers) are willing to pay the appropriate interest rate.

102

O.M. Amos, Jr. and J.R. Wingender,

Regional,financial

marketc

A third factor is the perception of a region by participants in national markets. National funding sources might ‘redline’ a region, refusing to provide funds at any interest rate, because it is considered a lost cause with little or no expectations for improvement. This could be a temporary situation that occurs when a region experiences a cyclical downturn (and is most in need of external funds) or is more enduring when a region has been distressed for a lengthy period. Version II indicates that these restraints on financial activity can accentuate the rapid decline of economic activity. While many of these institutional factors can be incorporated in the regional financial market mode1 through modification of the parameters, this analysis raises an even more fundamental question: Are regional expenditures affected more by the regional interest rate or by the amount of credit available to the region? Version I of this model, based on the first alternative, tends toward stable growth, except under extraordinary circumstances. Version II, on the other hand, is based on the assumption that the amount of regional credit enters directly into regional expenditure decisions. In this case, expansion of the regional economy is not dampened by an increase in the regional interest rate. Growth in the regional economy can cumulatively feed upon itself without the inhibition of a rising interest rate, so long as the regional credit supply expands. A simple test of this proposition is undertaken using gross product and net loans by commercial banks for each of the 50 states for the period 1964 1985. The following equations are estimated:

CRi, = .f;, +gi Yi, +

biBif + 24it3

(24)

where Yi, =gross state product in state i and year t; CR,, = the amount of credit (net loans) by commercial banks in state i and year t; Mi, = the percentage of manufacturing employment in state i and year t; Bi, = the gross state product from the banking sector in state i and year t; and e,, and uit are error terms. Eqs. (23) and (24) are estimated for each state using time series data from 1964 to 1985.” The coefficient estimates of b, c, and g are then used to indicate the relative importance of direct production activity (b) and indirect financial market activity (cg). The appendix presents estimated coefficients of eqs. (23) and (24) for each state. R2’s for all 50 estimates of eq. (23) are above 0.96, with the vast majority 0.99 and greater. The credit variable proved statistically significant in 28 of “Gross state product data are obtained from Economic Analysis. Net loan data are obtained Ahstract and FDIC Annual Banking Statistics.

computer disks obtained from the Bureau of from selected editions of the U.S. Stutistical

O.M. Amos, Jr. and J.R. Wingender, Regionalfinancial

markets

103

the 50 equations, with the lagged gross state produce term statistically significant in all 50 equations. R2’s for the estimates of eq. (24) are generally lower than eq. (23); however, all but four are above 0.90 and most are above 0.95. Gross state product is statistically significant in all but three of the estimates. Table 1 presents the estimates of b and cg for each state. In nine of the states cg is greater than b, indicating the indirect effect of production activity through the financial market is greater than the direct production effect. In 23 other states the indirect effect is greater than 0.1 with nine states exhibiting an indirect effect comparable to the direct effect (e.g. 0.4 versus 0.6). Overall, coefficients for 32 states suggest a significant role for regional financial markets on production activity, with only 18 states exhibiting a negligible or indiscernible effect.

6. Conclusions This analysis of regional financial markets and regional production is based on an extension of the models developed by Harrigan and McGregor and Moore et al. The two versions of the model explored in this analysis indicate the general interactive relationship between financial and economic activity at the same time suggesting potential differences in the structure of the regional economy that need further exploration. Version I of the model, assuming that regional expenditures are induced by the interest rate, indicates that convergent growth or decline is the norm, with explosive growth occurring in extraordinary circumstances. The key criterion in generating explosive growth is the relative magnitudes of the parameters identifying the effect of income on regional credit demand and supply. Explosive growth is realistically possible only if the supply parameter is greater than the demand parameter. If credit supply is induced more by income than credit demand, then the regional interest rate declines and regional expenditures are induced. Moreover, if credit demand and supply become perfectly elastic, then regional financial activity has no affect on regional income. Version II of the model, assuming that regional expenditures are induced by the net availability of regional credit, generates different conclusions. Although the relative magnitudes of the credit demand and supply parameters for income have the same interpretation, explosive growth is more likely in version II of the model than in version I. This occurs because regional expenditures are stimulated by net credit rather than the interest rate. Additional credit, whether accompanied by an increasing’or decreasing interest rate, stimulates regional expenditures. Furthermore, even if credit demand and supply become perfectly elastic, regional financial activity continues to impact regional income and explosive growth remains a possibility.

104

O.M. Amos, Jr. and J.R. Wingender, Regionalfinancial markets Table Estimated

direct

Direct Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming

1

production (b) and indirect (cg) effects.

0.88 1.28 0.84 0.49 1.02 0.54 1.11

I .08 1.12 1.08 0.14 0.95 0.98 0.35 0.49 0.63 0.73 0.71 I .06

1.02 1.13 0.48 0.73 0.37 0.09 0.51 0.6 1 1.01 1.08 1.14 0.88 1.13 0.99 0.42 0.85 0.10 0.15 0.88 1.24

1.03 0.78 0.84 1.31 0.74 I .03 I .04 0.61 0.56 0.69 0.56

(b)

financial Indirect

market (~,a)

0.34 0.15 0.35 0.65 0.03 0.52 0.01 0.00 -0.02 0.05 0.19 0.15 0.03 0.72 0.64 0.50 0.32 0.21 0.00 0.11 0.00 0.55 0.28 0.69 0.79 0.46 0.44 0.06 0.02 - 0.04 0.16 0.00 0.10 0.60 0.20 0.67 0.80 0.10 -0.10 0.02 0.01 0.30 -0.01 0.45 0.33 0.04 0.43 0.49 0.44 0.44

Source: Estimated from eqs. (23) and (24) using gross state product and net loan data for the period 19641985. Details of each equation are provided in the appendix.

O.M. Amos, Jr. and J.R. Wingender, Regionalfinancial markets

105

While version I of the model is presented as a logical extension of standard IS-LM macroeconomic analysis, version II is offered as a potential explanation for extraordinary conditions in regional economies. The empirical evidence in section 5 indicates that version II more accurately reflects the structure of regional economies. This analysis provides direction for subsequent investigations into the importance of this linkage. The implications of this analysis are also potentially important to bank regulation and management at the regional level. The alternative interactive mechanisms contains in versions I and II suggest the existence of differential regional policy options that need further exploration. Appropriate federal banking regulation and management practices, if the structure of the regional economy is accurately modeled by interest rate induced expenditures in version I, may be inappropriate if expenditures are credit induced as reflected by version II. There is a clear need for a thorough examination of the policy implications of the model developed here as a viable means of promoting regional economic growth and development.

O.M. Amos, Jr. and J.R. Wingender, Regional financial markets

106

Appendix: Estimated equations used to derive b and

cg

Table A. 1 State AL

Variable It

Constant 586 (0.094) ~ 1,339

1a

CR,"

Y~ i(b)

CRt(c)

0.875 (12.7)

0.709 (3.046)

M, (

Y~-l(g)

Y, CR,

AZ

Y, CR,

2,064 (0.560) -76 ( - 1.43) 3,318 11.1271 168

1.279 18.157)

2.206 ( - 1.685)

(

0.739 (2.504)

Y, CR,

CA

L CR,

CO

L CR,

CN

); CR,

DL

Y,,

0.485 13.411)

32.512

1.017 118.61

11.1741 -387 (0.08) 4,856 (0.797) 141 ( 1.361 710 ( -0.1491 4,228 1516) 102.7

10.112) CR, ( FL

L, (

('R, ( GA

L (

CR,

4,842 3.53) 1,975 0.1881 2,621 1.381 - 239 0.03) 498

1.793 (4.534)

1.870 (3.485)

~;

l

CR, ID

Y, 1

CR, IL

('R~

2,373 13.1! 104 ( 1.131 2,31/1 ( -0.911 410 (2.86) 12,615 (0.37) 15.467 ( 3.91

1.83 ( - 2.351

1.1184

(

-23.1 ( 4.381

0.031 0.30)

122 (3.55)

151.5 ((/.229)

O, 123 111.531

14.8

(

0.997

t

0.381 (1.84)

(

0.107 0.746)

3.10 (1.42)

O.986 0.995

132.2 11.1/41

(

0.975 0.997

0.38 -5.49) 0.977 {8.421

13 3.29)

198 2.76) ")9 0.-_ (5.64)

0.954 1111.41

0.893

2.13)

3.084 10.0141

(

0.780 0.998

I).417 17.921 0.862 (2.54)

0.906 /I.997

2.816

(I.52

0.739 (6.50)

0.998

( 0.1191

14.49) 1.079 ( 14.61

2.76 2.381

/).998

0.76 1.071 1.123 (23.8)

(

0.607 (0.030)

0.0007

(-0.061

0.967 1/.998

0.32 (9.00)

(21.81

8.65 (1.85)

-284 ( 0.744)

0.028 (0.1381

0.996 0.998

1,295 ( - 1.135)

0.28 123.01 1.108 114.61

0.983 0.997

78.44 (0.695)

(1 ./161 HW

11.7 ( - 1.961

0.20 (2.49) 0.540 (3.522)

0.970 0.996

0.36 117.21 0.157 (1.1931

26.8 (9.04)

182.3 ( - 1.0551 0.47 (5.67)

1,823 (-0.497) - 490 ( 4.8)

0.994 0.968

144.6 0.346)

(0.60) AR

- 10.9 (-6.93)

0.07 - 3.6) 0.841 (7.960)

R2 0.998

0.48 115.1)

(-6.711 AK

B,

3.48 0.48)

(

1.08 0.311

0.962 0.995

282.3 0.311 0.279 (3.44)

17.3 12.7(/)

I).965

O.M. Amos, Jr. and J.R. Wingender, Regionalfinancial markets Table A. 1 State

Variable

Constant

Y~ i ( b )

IN

Yt 1

3,354 (0.30) -2,281 (-6.91) 8,949 (0.98) 1,085 (-3.49) - 2,708 (-0.84) -- 841 (5.1) - 1,688 (-0.161 - 1,524 (-4.79) 14,563 0.42) 420 (0.90) 769 (1.18) 476 (4.91) 775 (0.40) -675 (1.73) -4,667 (0.78) 2,254 (1.02) -29,687 (1.38) -228 (0.36) 12,900 (1.611 1,760 (-3.90) 1,185 (0.251 - 217 -2.13) 19,600 (4.13) -685 -3.31 914.9 (0.44) 120 1.34) 2,753 (-0.60) -226 1.16)

0.354 (2.57)

CR, IA

Yl-I

CR, KS

Y,, CR,

KY

g,, CR,

LA

Y~-i

-

{

CR, ME

Y,, CR,

MD

CR, MA

Y,, CR,

M)

Yt-l CR,

MN

g,, CR,

MS

g,, CR,

MO

CR, MT

Y,, CR,

NB

CR,

-

-

continued

CRAc) 2.17 (5.73)

Mf

Y~-l(g)

0.629 (4.7)

0.728 (3.121

0.709 (3.20)

1.68 (5.0) 1.35 (3.56)

1.037 (1.78)

1.66 (1.43)

B,

189 (0.749) 0.33 (14.4)

0.491 (3.60)

107

392 (1.191

160 (1.131 -

0.996

-0.44 (0.42) -

0.995

0.38 (15.21 -

(

0.030 (0.14)

0.37 (17.61

- 1.66 (-2.74)

910 (0.48)

0.278 (1.99) -

0.31 (10.41 -

0.19 (0.18)

4.93 (2.53)

0.483 (2.62)

2.27 (3.68) -

714 ( 1.441

0.690 (2.35) -

- 447 ( - 1.451

0.734 (5.24)

0.366 (1.92)

0.094 (0.72)

0.40 (5.9) - 19.47 (-0.141 -

2.54 (7.38)

- 587 (-3.74)

0.613 (4.10)

1.252 (2.53)

1.288 (3.02)

(

-50.5 (-0.32) -

12.0 2.88I

10.4 (-- 1.8) -

0.244 (11.0)

0.910

0.965

2.19 (1.581 -

(

0.05 0.011

0.924 0.990 0.988 0.996 0.986 0.996

0.30 (12.61

0.72 (-0.76)

0.996 0.999

0.31 (15.1) 0.566 (3.78)

0.439 (0.329)

0.998 0.329 (10.9)

2.299 (3.92) -

0.981

0.999 0.377 (7.22)

112 (0.62)

0.993

0.998

-26.3 (-0.34)

-0.0006 (-0.005) -

0.995

0.984

-21.7 ( - 1.22t

1.128 (20.2) -

0.989

0.996

125 (0.37)

0.143 (8.0) 1.019 (22.5) -

-0.78 1.251

0.993

0.997

0.129 (3.131 1.06 (24.6)

R2 -

0.66 (0.85)

0.998 0.992

0.37 (10.9)

- 1.10 (1.06)

0.986 0.994

178 (0.72) 0.34 (9.25)

0.35 10.34)

0.988

O.M. Amos, Jr. and J.R. Wingender, Regionalfinuncial markets

108

Table

A.1 - continued

CR,(c)

state

Variable

Constant

r,- 1(b)

NV

r,-,

- 4,200 ( - 3.77) 285 (1.83) 423 (0.60) 379 (2.79) - 1,579 ( - 0.20) 1,844 (3.05) - 1,044 ( - 0.37) 75.1 (0.954) - 20,953 (~ 1.25) -61,914 (2.47) 11,937 (0.71) - 1,334 ( - 3.49) 401 (0.38) 41.4 ( - 0.42) 10,248 (0.37) -361 ( - 0.39) - 19,531 ( - 2.87) -213 (- 1.14) 17.839 (2.41) -4.34 ( - 0.034) 21,061 (1.21) - 2,383 (- 1.34) - 3,362 ( - 1.94) 557 (1.85) 3,710 (0.63) -150 ( - 0.78) - 4.407 (-2.72) - 1,817 (-2.25)

1.012 (26.4) -

1.144 (0.903) _

1.084 (18.5)

0.137 (0.74)

CR, NH

yt- 1 CR,

NJ

Yt-I CR,

NM

y,- 1 CR

NY

K-1 CR,

NC

K-1 CR,

ND

Y,- I

CR, OH

x-1 CR,

OK

Y,~1 CR,

OR

y,

I

CR, PA

y,- L CR,

RI

y,-

1

CR, SC

Y,-

I

CR, SD

r,

L

CR,

1.14 ( 14.4)

0.883 (3.94)

1.13 (32.5)

0.99 (8.80)

-0.14

( - 0.56) 0.829 (0.84)

-0.003 (-0.13) _ 0.191 (0.76)

M, ___

-13.9 (-0.71) _ 26.1 (0.12)

173 (0.44)

_ 0.44 (5.56) _ 0.16 (3.13) _

1.83 (3.86)

0.70 (1.71)

0.998

22.7 (2.08)

0.756

-22 ( - 6.45)

0.28 (2.04) _

-473 (- 1.12)

-0.33 (-0.28)

-3.51 (-1.20)

0.37 (5.21)

I .03 (12.1) -

0.10 (2.29) _

~ 77.7 ( - 0.57) _

0.78 (7.4) -

0.049 (1.11)

551 (2.85) _

3.55 (4.50)

0.997 0.996

0.293 (15.6)

- 2.54 (- 1.64) _

0.994

1.84 (0.42)

0.967

0.997

0.997

83.2 (1.90)

_

0.975 0.996

0.247 (10.1)

(- 1.47)

0.978 0.994

1,242 (3.30)

1.24 15.4) _

0.985 0.984

-211 (-0.32)

- 649 (-2.34)

0.998

0.997

- 32.3 (-0.20)

2.73 (4.63) _

0.974 0.992

- 267 ( - 0.69)

0.147 (0.74)

0.900

0.982

-0.475 (-0.93)

2.70 (4.47) _

-0.179

3.38 (0.9)

0.77 (0.39) _

0.29 (7.48)

0.88 10.9)

0.998

0.194 (4.59) 614 (1.08)

0.096 (0.40) _

0.925

- 6.92 ( - 2.36)

0.33 (7.8) 0.85 (5.95)

- 22.7 (-3.01)

0.997

0.29 (7.62) _

0.52 (12.6) 0.418 (2.63)

R2

B,

1,011 (3.93)

0.60 (6.65)

~ 22.3 (-2.32)

0.937 0.996

0.23 (9.05)

- 7.23 ( ~ 2.69)

0.959 0.989

0.27 (0.64)

34.7 (2.28)

0.833

O.M. Amos, Jr. and J.R. Wingender, Regionalfinancial markets

109

T a b l e A.I - c o n t i n u e d State

Variable

Constant

Y,- t(b)

TN

YI-I

--2,626 ( -0.25 207 (0.84 -- 7,505 (-0.17 95O (0.28 - 5,199 (-2.15 79.1 (1.39 5 (0.01 118 (2.013 5,092 (1.15) - 902 ( - 1.84) 1,309 (0.49) --737 ( - 5.7) 9,811 (0.661 - 607 (-2.36) - 8,375 ( - 1.37) - 400 ( - 1.27) - 1,172 (-0.23) 208 (3.36)

0.84 (8.17) -

0.85 (2.30) -

70.6 (0.25) -

1.31 (9.60)

--0.57 ( -- 1.73)

374 (0.18)

CR, TX

Yt-1 CRt

UT

Yt-~ CR,

VT

CR, VA

Yt-1 CR,

WV

Yt-t CR,

WA

Yt-i CR,

WS

Yt-t CR,

WY

Yt-t CR,

CR,(c)

M,

Yt- t(g) 0.35 (9.7)

1.27 (4.37)

1.18 (0.86)

0.997

-4.31 (-2.22)

0.990

14.3 (3.41)

325 (2.14) -- 5.82 (--2.93)

--1.17 (--0.11)

0.11 (0.61) -

- 185 ( - 1.12) -

0.61 (7.7) -

1.31 (5.28) -

-9.6 (--0.10) -

0.56 (6.18) -

1.52 (5.18) -

- 323 (-3.11) -

0.69 (8.77) -

1.30 (4.63) -

243 (1.46) -

0.56 (3.71) -

2.95 (2.03) -

113 (0.16) -

0.994 0.997

0.28 (7.12) 1.04 (16.l) -

0.978 0.998

0.35 (10.9) 1.03 (12.2)

R2 -

0.994 0.026 (0.257)

0.738 (8.94)

B,

1.93 (1.11)

0.976 0.999

0.35 (8.34) -

- 5.78 ( - 2.05) -

0.982

0.33 (18.9) -

--0.75 ( -- 1.66) -

0.992

0.32 (10.7) -

- 4.69 ( - 1.52) -

0.993

0.34 (12.7) -

- 3.07 ( - 2.08) -

0.15 (5.45)

0.23 (0.16

0.998

0.998

0.998 0.990 0.980 0.964

aEstimated using eq. (23). bEstimated using eq. (24). Or-values are in parentheses.

References

Agu, C.C., 1986, F i n a n c i a l i n s t i t u t i o n s a n d e c o n o m i c d e v e l o p m e n t : The experience of Nigeria, The S o u t h African J o u r n a l of E c o n o m i c s 54, 319-333. Beare J., 1976, A m o n e t a r i s t m o d e l of regional business cycles, J o u r n a l of R e g i o n a l Science 16, 57-63. Dixon, R. a n d A.P. Thirlwall, 1975, A model of regional g r o w t h - r a t e differences o n K a l d o r i a n lines, O x f o r d E c o n o m i c P a p e r s 27, 201-214. Dow, S.C., 1987, The t r e a t m e n t of m o n e y in regional economics, J o u r n a l of R e g i o n a l Science 27, 13-24. Fishkind, H., 1977, The regional i m p a c t of m o n e t a r y policy: An e c o n o m e t r i c s i m u l a t i o n s t u d y of I n d i a n a 1958-1973, J o u r n a l of Regional Science 17, 77-88.

R.S.UE. E

110

O.M.

Amos, Jr. and J.R. Wingender,

Re~ionul

/inunc~iul markets

Hansen, N.M., Development pole theory in a regional context, Kyklos 20, 709. 725. Harrigan, F.J. and P.G. McGregor, 1987, lnterregional arbitrage and the supply of loanable funds: A model of intermediate financial capital mobility, Journal of Regional Science 27, 357-367. Hirschman, A.O., 1958, Interregional and international transmission of economic growth, in: The strategy of economic development (Yale University Press, New Haven, CT) 183-201. Kaldor, N., 1957, A model of economic growth, Economic Journal 67, 591-624. Kaldor, N., 1970, The case for regional policies, Scottish Journal of Political Economy 17, 3377347. Lasuen, J.R., 1969. On growth poles, Urban Studies 6, 137-161. Moore, CL. and J.M. Hill, 1982, Interregional arbitrage and the supply of loanable funds, Journal of Regional Science 22, 499-5 127 Moore. CL.. G.J. Karaska and J.M. Hill, 1985, The impact of the banking system on regional analysis, Regional Studies 19, 29935. Myrdal G., 1957, Economic theory and under-developed regions (Gerald Duckworth and Co., London). Perroux, F., 1955. Note sur la notion de ‘pole de croissance”!, Economique Appliqee, 307-320. Translated as: Note on the concept of growth poles, and reprinted in: D. McKee, R. Dean and W. Leahy, eds., Regional economics: Theory and practice (The Free Press, New York, 1970) 933104. Roberts, R.B. and H. Fishkind, 1979. The role of monetary forces in regionai economic activity: An econometric simulation analysis, Journal of Regional Science 19, 15-29. Williamson, J.G., 1965, Regional inequality and the process of national development: A description of the patterns. Economic Development and Cultural Change 13, 345.