Financial Stability Policies and Bank Lending: Quasi-experimental Evidence from Federal Reserve Interventions in 1920-1921

Kilian Rieder

No 16490, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: How can policy-makers successfully tame excessive credit growth? I exploit a single natural experiment to estimate the comparative causal effects of different financial stability policies on bank-level credit. In 1920, four Federal Reserve Banks hiked their interest rate indiscriminately to safeguard financial stability. Another four Reserve Banks employed targeted rate action aimed at over-leveraged banks instead. For identification, I draw on border regression discontinuities with the remaining Federal Reserve districts which did not change their stance. The uniform rate hike had weak and partly counterproductive effects, whereas targeted policy caused credit to contract significantly.

Keywords: Monetary policy; Macroprudential policy; Leaning against the wind; Credit boom; Bank lending; Leverage; Federal reserve system; Progressive discount rate; Recession of 1920/1921 (search for similar items in EconPapers)
JEL-codes: E52 E58 N12 N22 (search for similar items in EconPapers)
Date: 2021-08
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