Did the Reserve Requirement Increases of 1936-37 Reduce Bank Lending? Evidence from a Quasi-Experiment

We analyze the impact of contractionary monetary policy through increases in reserve requirements on bank lending. We compare the lending behavior of banks that were subject to the requirement increases in 1936–37, Federal Reserve member banks, to a group of banks that were not subject to the reserv...

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Bibliographic Details
Published inJournal of money, credit and banking Vol. 47; no. 5; pp. 791 - 818
Main Authors PARK, HAELIM, VAN HORN, PATRICK
Format Journal Article
LanguageEnglish
Published Columbus Blackwell Publishing Ltd 01.08.2015
Wiley Subscription Services
Ohio State University Press
Subjects
bank credit
Bank loans
Banking
Capital market
Central banks
Comparative studies
Credit market
dual banking system
E51
E52
E58
Economic behaviour
Economic history
Estimation
excess reserves
Federal Reserve monetary policy
G21
G28
Impact analysis
Monetary policy
monetary policy transmission
N12
N22
Reserve requirements
United States > US
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Summary:We analyze the impact of contractionary monetary policy through increases in reserve requirements on bank lending. We compare the lending behavior of banks that were subject to the requirement increases in 1936–37, Federal Reserve member banks, to a group of banks that were not subject to the reserve increase, Federal Reserve nonmember banks. After implementing the difference-in-difference estimators, we find that the increases in reserve requirements did not create financing constraints for member banks and lead them to reduce lending. Therefore, the actions of the Federal Reserve concerning the required reserve ratios cannot be blamed for instigating the economic downturn of 1937–38.
Bibliography:ark:/67375/WNG-CHLPKK3K-P
ArticleID:JMCB12235
istex:D7401571A00A99C0BA3BDF070D446511CAB1B375
We thank Daniel Bogart, Michael Bordo, Charles Calomiris, Mark Carlson, John Cochrane, Yingying Dong, Benjamin Friedman, Eric Hilt, Anil Kashyap, Christoffer Koch, Seung Jung Lee, Joseph Mason, Kris Mitchener, Gary Richardson, Christina Romer, David Romer, Amir Sufi, and David Wheelock. Feedback from participants at the Economic History Association Meetings, the Midwest Economic Assocation Meetings, the Federal Reserve Bank of San Francisco's Central Banking in Historical Perspective Conference, and the Monetary Economics Workshop at the 2014 NBER Summer Institute are greatly appreciated.
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ISSN:0022-2879
1538-4616
DOI:10.1111/jmcb.12235