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Contagion During the Initial Banking Panic of the Great Depression

Listed author(s):
  • Erik Heitfield
  • Gary Richardson
  • Shirley Wang

The initial banking crisis of the Great Depression has been the subject of debate. Some scholars believe a contagious panic spread among financial institutions. Others argue that suspensions surged because fundamentals, such as losses on loans, drove banks out of business. This paper nests those hypotheses in a single econometric framework, a Bayesian hazard rate model with spatial and network effects. New data on correspondent networks and bank locations enables us to determine which hypothesis fits the data best. The best fitting models are ones incorporating network and geographic effects. The results are consistent with the description of events by depression-era bankers, regulators, and newspapers. Contagion - both interbank and spatial - propelled a panic which healthy banks survived but which forced illiquid and insolvent banks out of operations.

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File URL: http://www.nber.org/papers/w23629.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23629.

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Date of creation: Jul 2017
Handle: RePEc:nbr:nberwo:23629
Note: DAE
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  1. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, November.
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