Working Paper: NBER ID: w23511
Authors: Bruce Carlin; William Mann
Abstract: We provide causal evidence that discount rate changes by the Federal Reserve affected economic output in the 1920s. Our identification strategy exploits county-level variation in access to the Fed's discount window, and we implement this strategy with hand-collected data on banking and agriculture in Illinois in the early 20th century. The mechanism for the Fed's effect on agriculture was a bank credit channel, operating independently of any deflationary effect on money supply. Our findings suggest that the Fed deliberately managed transitory shocks during 1920-1921, mitigating debt burdens with which farms would struggle in the years leading to the Great Depression.
Keywords: No keywords provided
JEL Codes: B26; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal Reserve's discount rate changes (E52) | local economic output (R15) |
| aggressive rate increases (E43) | contraction in bank lending in rural areas (G21) |
| contraction in bank lending in rural areas (G21) | county-level agricultural output (Q11) |
| marginal dollar of bank credit (E51) | increase in agricultural output (Q11) |
| lowering the discount rate (E52) | agricultural output rebound (Q11) |
| higher fraction of national banks (G21) | relative drop in loans and agricultural output (Q14) |