Miron / Rigol“Bank Failures and Output during the Great Depression”

Vaughan / Economics 639

Key Findings

1. Replication of Bernanke’s results yielded same conclusions: Contemporaneous money surprises are positively correlated with

industrial production.First differences of deposits in failed backs and liabilities of failed

businesses are negatively correlated with industrial production.

But…

2. The results are largely driven by March 1933 (bank holiday). When that observation is omitted, the coefficients on failed bank deposits and failed firm liabilities are no longer significant.

Key Findings3. There is a potential simultaneity issue – are failures driving output or is

output driving failures?

– Assume, for the sake of argument, contemporaneous output is driving contemporaneous failures (i.e., that it takes at least one month for failures to have a negative impact on output).

– When contemporaneous failures are omitted from the specification (to isolate the impact of failures on output), coefficients on failed bank deposits and failed firm liabilities are no longer significant.

4. The economic significance of the effect of failures on output (assuming away issues #2 and #3) is modest at best. ─ Simulations of path of industrial production using Bernanke’s equation

with/without failed bank deposits and failed firm liabilities show a modest difference when failed bank deposits/firm liabilities are included.

How Important are Failures?

How Important are Bank Loans?

2.1%

5.3%

8.6%

3.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

1934 - 1937 1945 - 2007

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LOAN GROWTH VS. OUTPUT GROWTH1934-37 Recovery vs. Post-World War II Era

Annual Averages (Year-end to Year-end); Total Loans & Leases (all U.S. Commercial Banks) and U.S. Gross Domestic Product

(Nominal converted to real with GDP deflator.)

Average Annual Real Loan Growth

Average Annual Real GDP Growth

DATA SOURCESFederal Reserve Bank of St. Louis (FRED)FDIC, Historical Statisitcs on Banking