Is Deflation Cause For Panic? Evidence from the National Banking Era*

Casey Pender

No 23-04, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: This paper reexamines the traditional view that all unanticipated deflation can lead to bank panics. I identify two distinct deflationary shocks by employing a sign-restricted VAR on U.S. National Banking era with monthly data for prices, real output, and bank panics. While a negative aggregate demand shock increases the likelihood of a bank panic by 3.4%-8.4%, a positive aggregate supply shock has no significant effect. My results, therefore, align with recent theoretical work arguing that deflation's impact on banking panics also hinges on real output dynamics. Hence, not all deflation is cause for panic.

Keywords: Bank Panics; Deflation; U.S. Monetary History; Sign Restrictions (search for similar items in EconPapers)
JEL-codes: E31 E32 E44 E50 N11 N21 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2023-08-16
New Economics Papers: this item is included in nep-fdg, nep-his, nep-mac and nep-mon
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Published: Carleton Economics Working Papers

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Journal Article: Is deflation cause for panic? Evidence from the National Banking era (2024)
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