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Is deflation cause for panic? Evidence from the National Banking era

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  • Pender, Casey

Abstract

This paper examines the relationship between deflation, real output, and bank panics in the United States during the National Banking era from 1868 to 1913, a period marked by frequent deflationary episodes and many bank panics. Using a structural vector autoregression with sign restrictions, I distinguish between deflation as part of negative aggregate demand shocks and deflation as part of positive aggregate supply shocks. My findings indicate that negative aggregate demand shocks are associated with an increased likelihood of bank panics, while positive aggregate supply shocks are not. I then bolster these findings with case studies of the major bank panics of 1873, 1893, and 1907, analyzing stock data, bank clearing data, and narrative evidence. Combined, these results suggest that unexpected declines in nominal income, rather than deflation itself, contribute to financial stress, aligning with recent theoretical work.

Suggested Citation

  • Pender, Casey, 2024. "Is deflation cause for panic? Evidence from the National Banking era," Journal of Macroeconomics, Elsevier, vol. 82(C).
    • Handle: RePEc:eee:jmacro:v:82:y:2024:i:c:s0164070424000569
    DOI: 10.1016/j.jmacro.2024.103641
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    Keywords

    Bank panics; Deflation; U.S. monetary history; Sign restrictions;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • N11 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: Pre-1913
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913

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