Can monetary policy reduce the impact of a severe recession? A natural experiment is provided by the State of Mississippi. In December of 1930, there were a series of bank failures in the southern United States. The central portion of Mississippi falls into two Federal Reserve Districts: the sixth (Atlanta Fed) and the eighth (St. Louis Fed). The Atlanta Fed offered "easy money" to banks while the St. Louis Fed did not. On July 1, 1930 (just before the crisis), there were 105 State Charter banks in Mississippi in the sixth district and 154 banks in the eighth district. On July 1, 1931 (just after the crisis), there were 96 banks remaining in the sixth district and 126 in the eighth district. These data values are from Table 1, Gary Richardson and William Troost (2009) "Monetary Intervention Mitigated Banking Panics during the Great Depression: Quasi-Experimental Evidence from a Federal Reserve District Border, 1929-1933," Journal of Political Economy, 117(6), 1031-1073.

a. Let the eighth district be the control group and the sixth district be the treatment group. Construct a figure similar to Figure 7.3 using the four observations rather than sample means. Identify the treatment effect on the figure.

b. How many banks did each district lose during the crisis? Calculate the magnitude of the treatment effect using with these four observations, rather than sample means.

c. Suppose we have data on these two districts for 1929-1934, so \(N=12\). Let \(A F T E R_{t}=1\) for years after 1930, and let \(A F T E R_{t}=0\) for years 1929 and 1930. Let \(T R E A T_{i}=1\) for the sixth district and let \(T R E A T_{i}=0\) for banks in the eighth district. Let \(B A N K S_{i t}\) be the number of banks in each district in each year. Angrist and Pischke (2015, p. 188) report the estimated equation

Compare the estimated treatment effect from this equation to the calculation in (b). Is the estimated treatment effect significant, at the \(5 \%\) level?

Data From Figure 7.3:-

Transcribed Image Text:

BANKS = 167 -2.9TREAT - 49AFTER, +20.5 (TREAT, x AFTER,) (se) (8.8) (7.6) (10.7)