IDEAS home Printed from https://ideas.repec.org/p/srk/srkwps/2020113.html
   My bibliography  Save this paper

Financial stability policies and bank lending: quasi-experimental evidence from Federal Reserve interventions in 1920-21

Author

Listed:
  • Rieder, Kilian

Abstract

I estimate the comparative causal effects of monetary policy \leaning against the wind" (LAW) and macroprudential policy on bank-level lending and leverage by drawing on a single natural experiment. In 1920, when U.S. monetary policy was still decentralized, four Federal Reserve Banks implemented a conventional rate hike to address financial stability concerns. Another four Reserve Banks resorted to macroprudential policy with the same goal. Using sharp geographic regression discontinuities, I exploit the resulting policy borders with the remaining four Federal Reserve districts which did not change policy stance. Macroprudential policy caused both bank-level lending and leverage to fall significantly (by 11%-14%), whereas LAW had only weak and, in some areas, even perverse effects on these bank-level outcomes. I show that the macroprudential tool reined in over-extended banks more effectively than LAW because it allowed Federal Reserve Banks to use price discrimination when lending to highly leveraged counterparties. The perverse effects of the rate hike in some areas ensued because LAW lifted a pre-existing credit supply friction by incentivizing regulatory arbitrage. My results highlight the importance of context, design and financial infrastructure for the effectiveness of financial stability policies. JEL Classification: E44, E51, E52, E58, G21, N12, N22

Suggested Citation

  • Rieder, Kilian, 2020. "Financial stability policies and bank lending: quasi-experimental evidence from Federal Reserve interventions in 1920-21," ESRB Working Paper Series 113, European Systemic Risk Board.
    • Handle: RePEc:srk:srkwps:2020113
    as

    Download full text from publisher

    File URL: https://www.esrb.europa.eu//pub/pdf/wp/esrb.wp113~e8684e7ef6.en.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. repec:ucp:bkecon:9780226519999 is not listed on IDEAS
    2. Kris James Mitchener & Gary Richardson, 2013. "Shadowy Banks and Financial Contagion during the Great Depression: A Retrospective on Friedman and Schwartz," American Economic Review, American Economic Association, vol. 103(3), pages 73-78, May.
    3. Svensson, Lars E.O., 2017. "Cost-benefit analysis of leaning against the wind," Journal of Monetary Economics, Elsevier, vol. 90(C), pages 193-213.
    4. Kris James Mitchener & Gary Richardson, 2019. "Network Contagion and Interbank Amplification during the Great Depression," Journal of Political Economy, University of Chicago Press, vol. 127(2), pages 465-507.
    5. McCrary, Justin, 2008. "Manipulation of the running variable in the regression discontinuity design: A density test," Journal of Econometrics, Elsevier, vol. 142(2), pages 698-714, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Richardson, Gary & Van Horn, Patrick, 2018. "In the eye of a Storm: Manhattan's money center banks during the international financial crisis of 1931," Explorations in Economic History, Elsevier, vol. 68(C), pages 71-94.
    2. Haelim Anderson & Gary Richardson & Brian Yang, 2023. "Deposit Insurance and Depositor Monitoring: Quasi‐Experimental Evidence from the Creation of the Federal Deposit Insurance Corporation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(2-3), pages 441-464, March.
    3. Jaremski, Matthew, 2018. "The (dis)advantages of clearinghouses before the Fed," Journal of Financial Economics, Elsevier, vol. 127(3), pages 435-458.
    4. Jason M. Lindo & Nicholas J. Sanders & Philip Oreopoulos, 2010. "Ability, Gender, and Performance Standards: Evidence from Academic Probation," American Economic Journal: Applied Economics, American Economic Association, vol. 2(2), pages 95-117, April.
    5. Maria Donovan Fitzpatrick, 2010. "Preschoolers Enrolled and Mothers at Work? The Effects of Universal Prekindergarten," Journal of Labor Economics, University of Chicago Press, vol. 28(1), pages 51-85, January.
    6. repec:ces:ifodic:v:14:y:2016:i:1:p:19204333 is not listed on IDEAS
    7. Chen, Yi & Zhao, Yi, 2022. "The timing of first marriage and subsequent life outcomes: Evidence from a natural experiment," Journal of Comparative Economics, Elsevier, vol. 50(3), pages 713-731.
    8. Marcel Fafchamps & Julien Labonne, 2017. "Do Politicians’ Relatives Get Better Jobs? Evidence from Municipal Elections," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 33(2), pages 268-300.
    9. Verónica Amarante & Marco Manacorda & Edward Miguel & Andrea Vigorito, 2016. "Do Cash Transfers Improve Birth Outcomes? Evidence from Matched Vital Statistics, Program, and Social Security Data," American Economic Journal: Economic Policy, American Economic Association, vol. 8(2), pages 1-43, May.
    10. Tianyan Hu & Sandra L. Decker & Shin-Yi Chou, 2014. "The Impact of Health Insurance Expansion on Physician Treatment Choice: Medicare Part D and Physician Prescribing," NBER Working Papers 20708, National Bureau of Economic Research, Inc.
    11. Fanny Landaud & Son Thierry Ly & Éric Maurin, 2020. "Competitive Schools and the Gender Gap in the Choice of Field of Study," Journal of Human Resources, University of Wisconsin Press, vol. 55(1), pages 278-308.
    12. Konstantinos Matakos & Riikka Savolainen & Orestis Troumpounis & Janne Tukiainen & Dimitrios Xefteris, 2024. "Electoral Institutions and Intraparty Cohesion," Journal of Political Economy Microeconomics, University of Chicago Press, vol. 2(4), pages 883-916.
    13. David S. Lee & Pauline Leung & Christopher J. O’Leary & Zhuan Pei & Simon Quach, 2021. "Are Sufficient Statistics Necessary? Nonparametric Measurement of Deadweight Loss from Unemployment Insurance," Journal of Labor Economics, University of Chicago Press, vol. 39(S2), pages 455-506.
    14. Ivan A Canay & Vishal Kamat, 2018. "Approximate Permutation Tests and Induced Order Statistics in the Regression Discontinuity Design," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(3), pages 1577-1608.
    15. Maria Alice Moz-Christofoletti & Paula Carvalho Pereda & Wesley Campanharo, 2022. "Does Decentralized and Voluntary Commitment Reduce Deforestation? The Effects of Programa Municípios Verdes," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 82(1), pages 65-100, May.
    16. De Paola, Maria & Scoppa, Vincenzo, 2015. "Procrastination, academic success and the effectiveness of a remedial program," Journal of Economic Behavior & Organization, Elsevier, vol. 115(C), pages 217-236.
    17. Arteaga, Irma & Heflin, Colleen & Gable, Sara, 2016. "The impact of aging out of WIC on food security in households with children," Children and Youth Services Review, Elsevier, vol. 69(C), pages 82-96.
    18. Estefanía Galván, 2022. "Gender Identity and Quality of Employment," Economica, London School of Economics and Political Science, vol. 89(354), pages 409-436, April.
    19. Frederik von Waldow & Heike Link, 2024. "Spatial Competition and Pass-through of Fuel Taxes: Evidence from a Quasi-natural Experiment in Germany," Discussion Papers of DIW Berlin 2086, DIW Berlin, German Institute for Economic Research.
    20. Suman Banerjee & Saul Estrin & Sarmistha Pal, 2022. "Corporate disclosure, compliance and consequences: evidence from Russia," The European Journal of Finance, Taylor & Francis Journals, vol. 28(17), pages 1770-1802, November.
    21. Giancarlo Buitrago & Javier Amaya-Nieto & Grant Miller & Marcos Vera-Hernández, 2023. "Cost-Sharing in Medical Care Can Increase Adult Mortality: Evidence from Colombia," NBER Working Papers 31908, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    bank lending; credit boom; Federal Reserve System; financial crisis; leaning against the wind; leverage; macroprudential policy; monetary policy; progressive discount rate; recession of 1920/1921;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:srk:srkwps:2020113. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Official Publications (email available below). General contact details of provider: https://edirc.repec.org/data/esrbede.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.