New Working Papers
How do Financial Crises Redistribute Risk?
(with Angela Vossmeyer)
We examine how financial crises redistribute risk, employing novel empirical methods and mi- cro data from the largest financial crisis of the 20th century – the Great Depression. Using balance-sheet and systemic risk measures at the bank level, we build an econometric model with incidental truncation that jointly considers bank survival, the type of bank closure (consolidations, absorption, and failures), and changes to bank risk. Despite roughly 9,000 bank closures, risk did not leave the financial system; instead, it increased. We show that risk was redistributed to banks that were healthier prior to the financial crisis. A key mechanism driving the redistribution of risk was bank acquisition. Each acquisition increases the balance-sheet and systemic risk of the acquiring bank by 25%. Our findings suggest that financial crises do not quickly purge risk from the system, and that merger policies commonly used to deal with troubled financial institutions during crises have important implications for systemic risk.
NBER Working Paper 31537; CEPR Discussion Paper 18364; CESifo Working Paper 10597
Domino Secessions: Evidence from the U.S.
(with Kim Oosterlinck & Jean Lacroix)
We analyze how secession movements unfold and the interdependence of regions’ decisions to secede. We first model and then empirically examine how secessions can occur sequentially because the costs of secession decrease with the number of seceders and because regions update their decisions based on whether other regions decide to secede. We verify the existence of these “domino secessions” using the canonical case of the secession of southern U.S. states in the 1860s. We establish that financial markets priced in the costs of secession to geographically- specific assets (state bonds) after Lincoln’s election in the fall of 1860 – long before war broke out. We then show that state bond yields reflect the decreasing costs of secession in two ways. First, as the number of states seceding increased, yields on the bonds of states that had already seceded fell. Second, seceding states with more heterogeneous voters had higher risk premia, reflecting investors beliefs that further sub-secession was more likely in these locations.
Do Disinflation Policies Ravage Central Bank Finances?
(with Théodore Humann & Eric Monnet) (Forthcoming Economic Policy)
Advanced-economy central banks are currently experiencing losses. To examine how rate-tightening cycles affect central bank finances, we study the financial statements of ten advanced-economy central banks during the 1970s and 1980s, the most notable and comparable policy environment to the present. We find that central bank profits actually increased in response to the anti-inflationary measures of the 1980s. We thus discuss how central bank profits depend on their policy instruments as well as their balance-sheet position when rate tightening begins, rather than on the tightening per se. Unlike today, central banks in the 1980s avoided losses because they did not remunerate bank reserves and their balance sheets did not carry the legacy of a decade of large asset purchases at low interest rates and long maturity. Our counterfactuals show that only a combination of these factors could have triggered losses in the 1980s: none of them is sufficient on its own. When losses emerged in the late 1970s, before the Volcker shock, they were due to foreign-exchange reserves depreciating. In these instances, when central banks carried them forward and did not rely on transfers from the government, there was no loss of central bank independence or their ability to fight inflation.
Deep Roots: On the Persistence of American Populism
(with Helen Milner & Ze Han)
Is American populism a persistent political phenomena? Using a new dataset linking county vote shares in the 1890s with recent periods, we show that populist movements in the United States have deep roots. Counties where voters were enthusiastic about populist parties in the late nineteenth century had higher vote shares for Donald Trump in the 2016 and 2020 presidential elections. Exposure to globalization and the intergenerational transmission of political beliefs seem to be mechanisms behind this. Our instrumental variable results imply that globalization fostered populism in the 1890s which in turn laid the ground for populism today. Using individual policy preferences, we show that counties with more individuals holding populist at- titudes today are associated with counties voting more populist in the 1890s. Moments of rapid economic change, such as those engendered by globalization, may propel the resurgence of such attitudes, which can then be popularized by charismatic leaders.
SSRN Downloadable Working Paper
Connected Lending of Last Resort
(with Eric Monnet)
Because of secrecy, little is known about the political economy of central bank lending. Utilizing a novel, hand-collected historical daily dataset on loans to commercial banks, we analyze how personal connections matter for lending of last resort, highlighting the importance of governance for this core function of central banks. We show that, when faced with a banking panic in November 1930, the Banque de France (BdF) lent selectively rather than broadly, providing substantially more liquidity to connected banks – those whose board members were BdF shareholders. The BdF’s selective lending policy failed to internalize a negative externality – that lending would be insufficient to arrest the panic and that distress via contagion would spillover to connected banks. Connected lending of last resort fueled the worst banking crisis in French history, caused an unprecedented government bailout of the central bank, and resulted in loss of shareholder control over the central bank.
NBER Working Paper 30869; CEPR Discussion Paper 17831; CESifo Working Paper 10226
Do Pandemics Change Healthcare? Evidence from the Great Influenza
(with Rui Esteves, Peter Nencka and Melissa Thomasson)
Using newly digitized U.S. city-level data on hospitals, we explore how pandemics alter preferences for healthcare. We find that cities in the top half of the mortality distribution during the Great Influenza of 1918-1919 subsequently increased hospital capacity by 8-10 percent more than cities with lower levels of mortality. This effect, driven by growth in non-governmental hospitals, persisted until 1960. Growth responded most in richer cities, exacerbating inequalities in access to healthcare. Other types of city- level healthcare spending did not respond to pandemic intensity, suggesting that large health shocks may not lead to increased public provision of health services.
NBER Working Paper 30643; CEPR Discussion Paper 17666; CESifo Working Paper 10089
Contagion of Fear: Panics, Money, and the Great Depression
(with Gary Richardson and Fabrizio Marodin) (Forthcoming Explorations in Economic History)
Despite its centrality in debates about the causes and consequences of the Great Depression, banking panics’ impact on the money supply during this period remains a subject of ongoing debate. Before 1936, the Fed's decentralized structure meant that panics impacted money creation regionally while monetary impulses impacted bank stability nationally. We use this structure and newly digitized data to construct monetary aggregates at the Federal Reserve district level and apply a novel identification strategy that allows us to isolate the panics’ impact on monetary aggregates. We find that panics reduced the money supply by 27%, or in other words, that panics caused most of the decline in the money supply from June 1929 to December 1932.
NBER Working Paper 26859 [older and longer version]