1. (35 points) The following question is adapted from Mastering Metrics 5.1 A Mississippi Experiment. You are welcome to read the book as a background reference. Research question: Should the Fed lend money to banks or restrict credit during financial crisis? A natural experiment occurred in Mississippi during the 1930s. In November 1930, southern states experienced a serious financial crisis. The the St. Louis Fed, in charge of the 8th District, restricted credit. Atlanta Fe, running the 6th District, however, lent to troubled banks in the crisis. The border between the 6th and 8th Districts happens to run through the middle of Mississippi. FIGURE 5.2 Trends in bank failures in the Sixth and Eighth Federal Reserve Districts 180 160 Eighth District 140 Number of banks in business Sixth District 120 100 1929 1930 1931 1933 1932 Yaar 1994 Note: This figure shows the number of banks in operation in Mississippi in the Sixth and Eighth Federal Reserve Districts between 1929 and 1934. d. Do you think lending money to troubled banks during crisis would help save them? Why? f. Now focus on years 1929-1931. Define Ys,t where s is district and t is year (e.g. Y8,1929 is the outcome in district 8 in 1929). If you simply do a before-after comparison between Y6,1931 and Y6,1929. Do you think it renders the causal effect? Explain. g. How can you make the nave comparison (Y6,1931-Y6,1929) causal? (hint: use a control group) h. Write down the DID estimate using Ys,t notation 1. (35 points) The following question is adapted from Mastering Metrics 5.1 A Mississippi Experiment. You are welcome to read the book as a background reference. Research question: Should the Fed lend money to banks or restrict credit during financial crisis? A natural experiment occurred in Mississippi during the 1930s. In November 1930, southern states experienced a serious financial crisis. The the St. Louis Fed, in charge of the 8th District, restricted credit. Atlanta Fe, running the 6th District, however, lent to troubled banks in the crisis. The border between the 6th and 8th Districts happens to run through the middle of Mississippi. FIGURE 5.2 Trends in bank failures in the Sixth and Eighth Federal Reserve Districts 180 160 Eighth District 140 Number of banks in business Sixth District 120 100 1929 1930 1931 1933 1932 Yaar 1994 Note: This figure shows the number of banks in operation in Mississippi in the Sixth and Eighth Federal Reserve Districts between 1929 and 1934. d. Do you think lending money to troubled banks during crisis would help save them? Why? f. Now focus on years 1929-1931. Define Ys,t where s is district and t is year (e.g. Y8,1929 is the outcome in district 8 in 1929). If you simply do a before-after comparison between Y6,1931 and Y6,1929. Do you think it renders the causal effect? Explain. g. How can you make the nave comparison (Y6,1931-Y6,1929) causal? (hint: use a control group) h. Write down the DID estimate using Ys,t notation
