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An Experiment in Tight Monetary Policy: Revisiting the 1920–1921 Depression

Published online by Cambridge University Press:  11 April 2023

Bruce Carlin  and
William Mann Open the ORCID record for William Mann [Opens in a new window]
Bruce Carlin
Affiliation:
Rice University Jones Graduate School of Business carlin@rice.edu
William Mann*
Affiliation:
Emory University Goizueta Business School
*
william.mann@emory.edu (corresponding author)
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Abstract

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Is there a trade-off between the short-run and long-run real effects of monetary policy “leaning against the wind”? We provide novel evidence on this question from the United States in 1920–1921. Our identification strategy exploits county-level variation in access to the Federal Reserve’s discount window, and hand-collected data on banking and agriculture in Illinois. In the short term, tightened conditions at the discount window decreased bank lending and lowered crop prices and farm revenues. In the long term, however, they lowered debt-to-output levels and led to greater farmland utilization, suggesting an avoidance of debt overhang problems.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 41
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank two anonymous referees, Thierry Foucault (the editor), and conference discussants and seminar participants at the University of Chicago, UC Berkeley, UCLA, Rice University, Arizona State University, the University of Colorado, the University of Rochester, Indiana University, Michigan State University, the University of Queensland, the UBC Summer Finance Conference, the SFS Cavalcade, the Financial Intermediation Research Society Meetings, the Yale Junior Finance Conference, and the Australia National University Summer Research Camp for valuable comments and suggestions. Joseph Needle, Alex Simon, Darren Tan, and Billy Xu provided excellent research assistance. Mann gratefully acknowledges financial support from the Laurence and Lori Fink Center for Finance and Investments.

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