Seminario: "Financial Propagation of Commodity Booms in the Spatial Economy

Abstract

We study how multi-branch banks transmit liquidity shocks across regions following a natural resource boom. We propose a mechanism where a commodity boom increases deposits at banks present in resource-producing regions, enabling these banks to expand lending in both resource and non-resource regions. This cross-regional channeling of funds relaxes financial constraints in non-resource regions, generating localized Dutch disease even in areas without direct commodity exposure. Using detailed bank-firm loan microdata from Peru, a small open economy that experienced a mining boom in the 2000s, we document that banks more exposed to mining receive greater deposits and expand lending across all regions, with credit growth leaning toward the non-tradable sector. Firms connected to the mining boom through their banks increase hiring, particularly in non-tradables. We then build a spatial model with multi-branch banks to quantify the aggregate effects of this mechanism. Our results indicate that the banking system plays an important role in the spatial propagation of local shocks, and suggest that managing resource booms requires attention to financial regulation.