The Impact of Banking and Fiscal Policies on State-Level Economic Growth

Abstract

This paper investigates the hypothesis that economic growth is affected by banking structure and fiscal policies. We use data from the 48 contiguous states for the period 1950‐1980 aggregated into six five‐year time periods, primarily to test the effect of the following factors on growth of state per capita income: (i) restrictions over branch banking, (ii) restrictions over multibank holding companies, (iii) the depth of financial assets in a state, (iv) the financial‐intermediary mix, (v) the size of state government, and (vi) the methods of financing state government. We find no support for the hypotheses that branch banking or multibank holding company restrictions affect growth. However, financial depth and the mix of financial intermediaries are strongly correlated with economic growth. Finally, the state fiscal policy variables had no significant effect on income growth.

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