Bank Failures and Output During the Great Depression
In response to the Financial Crisis of 2008, macroeconomic policymakers employed a range of tools designed to prevent failures of large, complex financial institutions ("banks"). The Treasury and the Fed justified these actions by arguing that bank failures exacerbate output declines, rather than just reflecting output losses that have already occurred. This view is consistent with economic models based on credit market imperfections, but it is an empirical question as to whether the feedback from failures to output losses is substantial.
This paper examines the relation between bank failures and output by re-considering Bernanke's (1983) analysis of the Great Depression. We find little indication that bank failures exerted a substantial or sustained impact on output during this period.
We thank Jaron Cordero, Linxi Wu, and Stephanie Hurder for superb research assistance. John Lapp, Randall Parker, Greg Mankiw, Tom Sargent, Kate Waldock and participants at the Wake Forest conference "The Federal Reserve Was a Bad Idea" provided helpful comments on an earlier draft. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.