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The Effect of the Central Bank Liquidity Support during Pandemics: Evidence from the 1918 Spanish Influenza Pandemic

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Abstract

The coronavirus outbreak raises the question of how central bank liquidity support affects financial stability and promotes economic recovery. Using newly assembled data on cross-county flu mortality rates and state-charter bank balance sheets in New York, we investigate the effects of the 1918 Influenza Pandemic on the banking system and the role of the Federal Reserve during the pandemic. We find that banks located in more severely affected areas experienced deposit withdrawals. Banks which were members of the Federal Reserve were able to access central bank liquidity and so continue or even expand lending. Banks which were not members, however, did not borrow on the interbank market but rather curtailed lending, suggesting there was little-to-no pass-through of central bank liquidity. Further, in the counties most affected by the 1918 Influenza, even banks with direct access to the discount window liquidated assets so as to meet large deposit withdrawals, suggesting limits to the effectiveness of the liquidity provision by the Federal Reserve. Finally, we show that the pandemic caused only a short-term disruption on the financial sector. Over the long-term, deposits returned and banks restored their asset portfolios.

Suggested Citation

  • Haelim Anderson & Jin-Wook Chang & Adam Copeland, 2020. "The Effect of the Central Bank Liquidity Support during Pandemics: Evidence from the 1918 Spanish Influenza Pandemic," Finance and Economics Discussion Series 2020-050, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2020-50
    DOI: 10.17016/FEDS.2020.050
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    References listed on IDEAS

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    1. Haelim Anderson & Charles W. Calomiris & Matthew Jaremski & Gary Richardson, 2018. "Liquidity Risk, Bank Networks, and the Value of Joining the Federal Reserve System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(1), pages 173-201, February.
    2. Haelim Anderson & Mark Paddrik & Jessie Jiaxu Wang, 2019. "Bank Networks and Systemic Risk: Evidence from the National Banking Acts," American Economic Review, American Economic Association, vol. 109(9), pages 3125-3161, September.
    3. Clay, Karen & Lewis, Joshua & Severnini, Edson, 2018. "Pollution, Infectious Disease, and Mortality: Evidence from the 1918 Spanish Influenza Pandemic," The Journal of Economic History, Cambridge University Press, vol. 78(4), pages 1179-1209, December.
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    RePEc Biblio mentions

    As found on the RePEc Biblio, the curated bibliography for Economics:
    1. > Economics of Welfare > Health Economics > Economics of Pandemics > Specific pandemics > Spanish Influenza

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    More about this item

    Keywords

    1918 Spanish influenza; Pandemics; Financial stability; Bank lending; Economic recovery;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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