Working Paper: NBER ID: w1374
Authors: James A. Wilcox
Abstract: This article assesses the extent to which government-administered financial shocks and lower interest rates can account for the massive accumulation of bank excess reserves in the Great Depression. Both factors are shown to be statistically significant. Financial shocks did exert astatistically detectable influence on the demand for excess reserves but those shocks at best can account for a step-like increase in the level of reserves held, an increase which was completed in less than a year. Financial shocks can explain no more than 1 percent of the variation in excess reserves during the Great Depression. We demonstrate that the most statistically appropriate form of the demand function is one which flattened rapidly as interest rates fell. The fall in interest rates can account for 80 percent of the movement of excess reserves during the Great Depression.
Keywords: Excess reserves; Great Depression; Monetary policy; Financial shocks; Interest rates
JEL Codes: E5; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial shocks (F65) | demand for excess reserves (E41) |
| decline in interest rates (E43) | demand for excess reserves (E41) |
| decline in interest rates (E43) | excess reserves (E51) |
| financial shocks + decline in interest rates (E44) | demand for excess reserves (E41) |
| interest rates (E43) | excess reserves (E51) |