The Monetary Policy, Credit Constraint and Spatial Distribution of Economic Activity: A Contribution of New Economic Geography

Authors

Faculty of Economics & Administrative Sciences, University of Mazandaran, Babolsar, Iran

Abstract

T





his paper investigates the effect of monetary policy on the distribution of economic activity and agglomeration economies within a country. The considered channel for this effectiveness is the availability of credit to firms in various regions and the effects on the labor and consumer welfare. For this purpose, data for manufacturing firms located in 30 different provinces in Iran during 2007 and 2014 gathered. The empirical results from spatial panel data show that beside conventional channel of effectiveness through consumer and labor force utility function, regional monetary policy implication through uneven distribution of regional loanable banking fund seems to be substantial centripetal force. In terms of most well-known NEG variable, uneven regional accessibility of credit market has opposite regional implication as trade freeness. While the former leads to more concentration of economic activity across space, the latter tends to drive dispersion. It is assumable that monetary policy reduce the impact of credit constraints on firms but the degree of credit availability in regions is a significant driver for concentration of economic activity. The result shows the importance of accessibility to banking loans on distribution of economic activities within the country.
 

Keywords

References

Alecke, B., Alsleben, C., Scharr, F., & Untiedt, G. (2008). Geographic Concentration of Sectors in the German Economy: Some Unpleasant Macroeconomic Evidence for Regional Cluster Policy. In U. Blien, & G. Maier, The Economics of Regional Clusters. Networks, Technology and Policy, New Horizons in Regional Science (209-233). Cheltenham: Edward Edgar Publishing.
Arena, M. P., & Dewally, M. (2012). Firm Location and Corporate Debt. Journal of Banking & Finance, 36(4), 1079-1092.
Artis, M., Curran, D., & Sensier, M. (2011). Investigating Agglomeration Economies in a Panel of European Cities and Regions. Retrieved from
http://eprints.lse.ac.uk/58459/1/__lse.ac.uk_storage_LIBRARY_Secondary_libfile_shared_repository_Content_SERC%20discussion%20papers_2011_sercdp0078.pdf.
Ascani, A., Crescenzi, R., & Iammarino, S. (2012). New Economic Geography and Economic. WP1/02 Search Working Paper, Retrieved from
http://www.ub.edu/searchproject/wp-content/uploads/2012/02/WP-1.2.pdf.
Atanasova, C. V., & Wilson, N. (2004). Disequilibrium in the UK Corporate Loan Market. Journal of Banking & Finance, 28(3), 595-614.
Azzoni, C. R., & Servo, L. (2002). Education, Cost of Living and Regional Wage Inequality in Brazil. Papers in Regional Science, 81(2), 157-175.
Bacolod, M., Blum, B. S., & Strange, W. C. (2009). Skills in the City. Journal of Urban Economics, 65(2), 136-153.
Baldwin, R. E. (1999). Agglomeration and Endogenous Capital. European Economic Review, 43(2), 253-280.
Baldwin, R. E. (2001). Core-periphery Model with Forward-looking Expectations. Regional Science and Urban Economics, 31(1), 21-49.
Baldwin, R. E., Martin, P., & Ottaviano, G. I. (2001). Global Income Divergence, Trade, and Industrialization: The Geography of Growth Take-offs. Journal of Economic Growth, 6(1), 5-37.
Baldwin, R., Forslid, R., Martin, P., Ottaviano, G., & Robert-Nicoud, F. (2003). Public Policies and Economic Geography. Princeton: PUP.
Baltagi, B. H., Song, S. H., & Koh, W. (2003). Testing Panel Data
Regression Models with Spatial Error Correlation. Journal of Econometrics, 117(1), 123-150.
Barro, R. J., Sala-i-Martin, X., Blanchard, O. J., & Hall, R. E. (1991). Convergence across States and Regions. Retrieved from https://www.econstor.eu/bitstream/10419/160551/1/cdp629.pdf.
Bebchuk, L. A., & Cohen, A. (2003). Firms’ Decisions Where to Incorporate. The Journal of Law and Economics, 46(2), 383-425.
Becker, B. (2007). Geographical Segmentation of US Capital Markets. Journal of Financial Economics, 85(1), 151-178.
Beenstock, M., & Felsenstein, D. (2008). Regional Heterogeneity, Conditional Convergence and Regional Inequality. Regional Studies, 42(4), 475-488.
Beenstock, M., & Felsenstein, D. (2010). Marshallian Theory of Regional Agglomeration. Papers in Regional Science, 89(1), 155-172.
Berger, A. N., Miller, N. H., Petersen, M. A., Rajan, R. G., & Stein, J. C. (2005). Does Function Follow Organizational Form? Evidence from the Lending Practices of Large and Small Banks. Journal of Financial Economics, 76(2), 237-269.
Berliant, M., Reed, R. R., & Wang, P. (2006). Knowledge Exchange, Matching, and Agglomeration. Journal of Urban Economics, 60(1), 69-95.
Boschma, R. (2005). Proximity and Innovation: a Critical Assessment. Regional Studies, 39(1), 61-74.
Brealey, R., Leland, H. E., & Pyle, D. H. (1977). Informational Asymmetries, Financial Structure, and Financial Intermediation. The Journal of Finance, 32(2), 371-387.
Brickley, J. A., Linck, J. S., & Smith, C. W. (2003). Boundaries of the Firm: Evidence from the Banking Industry. Journal of Financial Economics, 70(3), 351-383.
Capello, R. (2007). Regional Economics. New York: Routledge.
Charlot, S., & Duranton, G. (2004). Communication Externalities in Cities. Journal of Urban Economics, 56(3), 581-613.
Chen, Z., Jin, Y., & Lu, M. (2008). Economic Opening and Industrial Agglomeration in China. In Economic Integration in East Asia: Perspectives from Spatial and Neoclassical Economics (276-280). Cheltenham: Edward Edgar Publishing Limited.
Choi, W. G., & Kim, Y. (2005). Trade Credit and the Effect of Macro-financial Shocks: Evidence from US Panel Data. Journal of Financial and Quantitative Analysis, 40(4), 897-925.
Coval, J. D., & Moskowitz, T. J. (1999). Home Bias at Home: Local Equity Preference in Domestic Portfolios. The Journal of Finance, 54(6), 2045-2073.
Danielson, M. G., & Scott, J. A. (2004). Bank Loan Availability and Trade Credit Demand. Financial Review, 39(4), 579-600.
Dass, N., & Massa, M. (2011). The Impact of a Strong Bank-firm Relationship on the Borrowing Firm. The Review of Financial Studies, 24(4), 1204-1260.
Duranton, G., & Monastiriotis, V. (2002). Mind the Gaps: the Evolution of Regional Earnings Inequalities in the UK, 1982–1997. Journal of Regional Science, 42(2), 219-256.
Duranton, G., & Puga, D. (2004). Micro-foundations of Urban Agglomeration Economies. Handbook of Regional and Urban Economics, 4, 2063-2117.
Egeraat, C. V., & Jacobson, D. (2006). The Geography of Linkages in the Irish and Scottish Computer Hardware Industry: the Role of Information Exchange. Journal of Economic and Social Geography, 97(4), 45-18.
Ellison, G., & Glaeser, E. L. (1997). Geographic Concentration in US Manufacturing Industries: a Dartboard Approach. Journal of Political Economy, 105(5), 889-927.
Faggio, G., Silva, O., & Strange, W. C. (2017). Heterogeneous Agglomeration. Review of Economics and Statistics, 99(1), 80-94.
Fauceglia, D. (2015). Credit Constraints, Firm Exports and Financial Development: Evidence from Developing Countries. The Quarterly Review of Economics and Finance, 55, 53-66.
Fisman, R., & Love, I. (2003). Trade Credit, Financial Intermediary Development, and Industry Growth. The Journal of Finance, 58(1), 353-374.
Fu, S. (2007). Smart Café Cities: Testing Human Capital Externalities in the Boston Metropolitan Area. Journal of Urban Economics, 61(1), 86-111.
Fujita, M. (1988). A Monopolistic Competition Model of Spatial Agglomeration: Differentiated Product Approach. Regional Science and Urban Economics, 18(1), 87-124.
Fujita, M., & Krugman, P. (2004). The New Economic Geography: Past, Present and the Future. Papers in Regional Science, 83(1), 139-164.
Fujita, M., & Thisse, J. F. (2009). New Economic Geography: an Appraisal on the Occasion of Paul Krugman's 2008 Nobel Prize in Economic Sciences. Regional Science and Urban Economics, 39(2), 109-119.
---------- (1996). Economics of Agglomeration. Journal of the Japanese and International Economies, 10(4), 339-378.
Fujita, M., & Thisse, J. F. (2013). Economics of Agglomeration: Cities, Industrial Location, and Globalization. Cambridge: Cambridge University Press.
Fujita, M., Krugman, P. R., Venables, A. J., & Fujita, M. (1999). The Spatial Economy: Cities, Regions and International Trade. Cambridge, MA: MIT Press.
Garcia-Appendini, E., & Montoriol-Garriga, J. (2013). Firms as Liquidity Providers: Evidence from the 2007–2008 Financial Crisis. Journal of Financial Economics, 109(1), 272-291.
Ge, Y., & Qiu, J. (2007). Financial Development, Bank Discrimination and Trade Credit. Journal of Banking & Finance, 31(2), 513-530.
Grinblatt, M., & Keloharju, M. (2001). How Distance, Language, and Culture Influence Stockholdings and Trades. The Journal of Finance, 56(3), 1053-1073.
Grossman, G. M., & Helpman, E. (1993). Innovation and Growth in the Global Economy. Cambridge, MA: MIT Press.
Guimaraes, P., Figueiredo, O., & Woodward, D. (2000). Agglomeration and the Location of Foreign Direct Investment in Portugal. Journal of Urban Economics, 47(1), 115-135.
Harrison, B. (2007). Industrial Districts: Old Wine in New Bottles. Regional Studies, 41(S1), S107-S121.
Hauswald, R., & Marquez, R. (2006). Competition and Strategic Information Acquisition in Credit Markets. The Review of Financial Studies, 19(3), 967-1000.
Helsley, R. W., & Strange, W. C. (2004). Knowledge Barter in Cities. Journal of Urban Economics, 56(2), 327-345.
Henderson, J. V. (1974). The Sizes and Types of Cities. The American Economic Review, 64(4), 640-656.
Hoover, E. M. (1937). Location Theory and the Shoe Leather Industries. Cambridge: Harvard University Press.
Krugman, P. (1991a). History versus Expectations. The Quarterly Journal of Economics, 106(2), 651-667.
---------- (1991b). Increasing Returns and Economic Geography. Journal of Political Economy, 99(3), 483-499.
Krugman, P., & Venables, A. J. (1995). Globalization and the Inequality of Nations. The Quarterly Journal of Economics, 110(4), 857-880.
Loughran, T. (2008). The Impact of Firm Location on Equity Issuance. Financial Management, 37(1), 1-21.
Loughran, T., & Schultz, P. (2005). Liquidity: Urban versus Rural Firms. Journal of Financial Economics, 78(2), 341-374.
Love, I., Preve, L. A., & Sarria-Allende, V. (2007). Trade Credit and Bank Credit: Evidence from Recent Financial Crises. Journal of Financial Economics, 83(2), 453-469.
Maier, G., & Weiss, P. (1986). The Importance of Regional Factors in the Determination of Earnings: the Case of Austria. International Regional Science Review, 10(3), 211-220.
Malloy, C. J. (2005). The Geography of Equity Analysis. The Journal of Finance, 60(2), 719-755.
Malmberg, A. (1996). Industrial Geography: Agglomeration and Local Milieu. Progress in Human Geography, 20(3), 392-403.
Malmberg, A., & Maskell, P. (2002). The Elusive Concept of Localization Economies: Towards a Knowledge-based Theory of Spatial Clustering. Environment and Planning A, 34(3), 429-449.
Marotta, G. (1997). Does Trade Credit Redistribution Thwart Monetary Policy? Evidence from Italy. Applied Economics, 29(12), 1619-1629.
Marshall, A. (1920). Principles of Economics: an Introductory Volume. Retrieved from
https://dspace.gipe.ac.in/xmlui/bitstream/handle/10973/24970/GIPE-013013.pdf?sequence=3.
Martin, P., & Ottaviano, G. I. (2001). Growth and Agglomeration. International Economic Review, 42(4), 947-968.
Mateut, S., Bougheas, S., & Mizen, P. (2006). Trade Credit, Bank Lending and Monetary Policy Transmission. European Economic Review, 50(3), 603-629.
Matsuyama, K. (2005). Credit Market Imperfections and Patterns of International Trade and Capital Flows. Journal of the European Economic Association, 3(2-3), 714-723.
McCann, P. (2001). Urban and Regional Economics. Oxford: OUP Catalogue.
Melitz, M. J. (2003). The Impact of Trade on Intra‐industry Reallocations and Aggregate Industry Productivity. Econometrica, 71(6), 1695-1725.
Melo, P. C., Graham, D. J., & Noland, R. B. (2009). A Meta-analysis of Estimates of Urban Agglomeration Economies. Regional Science and Urban Economics, 39(3), 332-342.
Myers, S. C. (1977). Determinants of Corporate Borrowing. Journal of Financial Economics, 5(2), 147-175.
Neary, J. P. (2001). Of Hype and Hyperbolas: Introducing the New Economic Geography. Journal of Economic Literature, 39(2), 536-561.
Oerlemans, L., & Meeus, M. (2005). Do Organizational and Spatial Proximity Impact on Firm Performance? Regional Studies, 39(1), 89-104.
Ottaviano, G. (2003). Regional Policy in the Global Economy: Insights from New Economic Geography. Regional Studies, 37(6-7), 665-673.
Ottaviano, G., & Thisse, J. F. (2004). Agglomeration and Economic Geography. Handbook of Regional and Urban Economics, 4, 2563-2608.
Ottaviano, G., Tabuchi, T., & Thisse, J. F. (2002). Agglomeration and Trade Revisited. International Economic Review, 43(2), 409-435.
Palmberg, J. (2012). Spatial Concentration in the Financial Industry. In The Spatial Market Process (313-333). Retrieved from
http://ratio.se/app/uploads/2014/11/jp_financial-industry_188.pdf.
Papke, L. E. (1991). Interstate Business Tax Differentials and New Firm Location. Journal of Public Economics, 45(1), 47-68.
Parr, J. B. (2002). Agglomeration Economies: Ambiguities and Confusions. Environment and Planning A, 34(4), 717-731.
Petersen, M. A., & Rajan, R. G. (2002). Does distance still matter? The information revolution in small business lending. The journal of Finance, 57(6), 2533-2570.
---------- (1997). Trade Credit: Theories and Evidence. The Review of Financial Studies, 10(3), 661-691.
---------- (1994). The Benefits of Lending Relationships: Evidence from Small Business Data. The Journal of Finance, 49(1), 3-37.
Puga, D. (2010). The Magnitude and Causes of Agglomeration Economies. Journal of Regional Science, 50(1), 203-219.
---------- (2002). European Regional Policies in Light of Recent Location Theories. Journal of Economic Geography, 2(4), 373-406.
---------- (1999). The Rise and Fall of Regional Inequalities. European Economic Review, 43(2), 303-334.
Quigley, J. M. (2009). Urbanization, Agglomeration, and Economic Development. Urbanization and Growth, Retrieved from
https://openknowledge.worldbank.org/bitstream/handle/10986/28042/577190NWP0Box353766B01PUBLIC10gcwp019web.pdf?sequence=1.
Rosenthal, S. S., & Strange, W. C. (2006). The Micro-empirics of Agglomeration Economies. A Companion to Urban Economics, Retrieved from
http://ss.rrojasdatabank.info/Agglomerationmicro2004.pdf.
---------- (2004). Evidence on the Nature and Sources of Agglomeration Economies. Handbook of Regional and Urban Economics, 4, 2119-2171.
Rosenthal, S. S., & Strange, W. C. (2001). The Determinants of Agglomeration. Journal of Urban Economics, 50(2), 191-229.
Smith, J. K. (1987). Trade Credit and Informational Asymmetry. The Journal of Finance, 42(4), 863-872.
Storper, M. (1995). The Resurgence of Regional Economies, Ten Years Later: the Region as a Nexus of Untraded Interdependencies. European Urban and Regional Studies, 2(3), 191-221.
Storper, M., & Venables, A. J. (2004). Buzz: Face-to-face Contact and the Urban Economy. Journal of Economic Geography, 4(4), 351-370.
Thisse, J. F., & Fujita, M. (2002). Economics of Agglomeration. Cambridge, UK: Cambridge University Press.
Tsuruta, D. (2015). Bank Loan Availability and Trade Credit for Small Businesses during the Financial Crisis. The Quarterly Review of Economics and Finance, 55, 40-52.
Venables, A. J. (1996). Equilibrium Locations of Vertically Linked Industries. International Economic Review, 37(2), 341-359.
Wan, G., Lu, M., & Chen, Z. (2004). Globalization and Regional Income Inequality: Evidence from within China (2004/10). WIDER Discussion Papers, World Institute for Development Economics (UNU-WIDER), Retrieved from
https://www.econstor.eu/bitstream/10419/52870/1/477305393.pdf.
Wen, M. (2004). Relocation and Agglomeration of Chinese Industry. Journal of Development Economics, 73(1), 329-347.
Wheeler, C. H. (2001). Search, Sorting, and Urban Agglomeration. Journal of Labor Economics, 19(4), 879-899.
Orlowski, L. T. (2015). Monetary Expansion and Bank Credit: A Lack of Spark. Journal of Policy Modeling, 37(3), 510-520.
Iranian Economic Review
Volume 23, Issue 1
January 2019
Pages 1-27

Files

Share

How to cite

Statistics