Interregional capital transfers and interest rate differentials: An empirical note

Abstract

Over the last several years, considerable attention has been directed to the analysis of interregional and international capital transfers. A few of these studies have been concerned with the persistence of interregional interest rate differentials over time. In this vein, Davis and Banks have argued that between regions within the United States there have been persistent regional differences in going interest rates over very long periods and a tendency for particular regions to show persistently higher or lower than average rates for a variety of different instruments. Unfortunately, the Davis-Banks argument is based upon casual observation rather than upon formal empirical testing. In analytical terms, it has been elsewhere shown that persistent interregional interest rate differentials, if they in fact do exist, may be entirely compatible with conventional economic theory once it is recognized that there may exist barriers of one form or another to the interregional flow of funds. Using this framework of analysis as a point of departure, this paper examines whether the interregional flow of funds within the United States over time has in fact been insensitive to interest rate differentials.