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Reallocating Liquidity to Resolve a Crisis: Evidence from the Panic of 1873

Author

Listed:
  • Haelim Anderson
  • Kinda Cheryl Hachem
  • Simpson Zhang

Abstract

We study financial stability with constraints on central bank intervention in a model with belief-driven bank runs. A pecuniary externality arises in the decentralized market for interbank loans and leads to excessively many bank failures. A forced reallocation of liquidity across banks improves social welfare and can be implemented through the issuance of clearinghouse loan certificates, such as those issued in New York City during the Panic of 1873. A new dataset constructed from archival records reveals that the New York Clearinghouse issued loan certificates to member banks in the way our model suggests would have helped resolve the panic.

Suggested Citation

  • Haelim Anderson & Kinda Cheryl Hachem & Simpson Zhang, 2021. "Reallocating Liquidity to Resolve a Crisis: Evidence from the Panic of 1873," NBER Working Papers 28870, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28870
    Note: CF DAE ME
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    Cited by:

    1. Metrick, Andrew, 2022. "Broad-Based Emergency Liquidity Programs," Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 4(2), pages 86-178, April.

    More about this item

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913

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