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NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Working Papers by Eric Hughson

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Working Papers

October 2008Can a Lender of Last Resort Stabilize Financial Markets? Lessons from the Founding of the Fed
with Asaf Bernstein, Marc D. Weidenmier: w14422
We use the founding of the Federal Reserve as a historical experiment to provide some insight into whether a lender of last resort can stabilize financial markets. Following the Panic of 1907, Congress passed two measures that established a lender of last resort in the United States: (1) the Aldrich-Vreeland Act of 1908 which authorized certain banks to issue emergency currency during a financial crisis and (2) the Federal Reserve Act of 1913 which established a central bank. We employ a new identification strategy to isolate the effects of the introduction of a lender of last resort from other macroeconomic shocks. We compare the standard deviation of stock returns and short-term interest rates over time across the months of September and October, the two months of the year when financial...

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