The Effect of the Central Bank Liquidity Support during Pandemics: Evidence from the 1918 Influenza Pandemic

42 Pages Posted: 2 Jun 2020

See all articles by Haelim Anderson

Haelim Anderson

Government of the United States of America – Federal Deposit Insurance Corporation

Jin-Wook Chang

Board of Governors of the Federal Reserve System

Adam M. Copeland

Federal Reserve Bank of New York

Date Written: May 2020

Abstract

The coronavirus outbreak raises the question of how central bank liquidity support affects financial stability and promotes economic recovery. Using newly assembled data on cross-county flu mortality rates and state-charter bank balance sheets in New York State, we investigate the effects of the 1918 influenza pandemic on the banking system and the role of the Federal Reserve during the pandemic. We find that banks located in more severely affected areas experienced deposit withdrawals. Banks that were members of the Federal Reserve System were able to access central bank liquidity, enabling them to continue or even expand lending. Banks that were not System members, however, did not borrow on the interbank market, but rather curtailed lending, suggesting that there was little-to-no pass-through of central bank liquidity. Further, in the counties most affected by the 1918 pandemic, even banks with direct access to the discount window did not borrow enough to offset large deposit withdrawals and so liquidated assets, suggesting limits to the effectiveness of liquidity provision by the Federal Reserve. Finally, we show that the pandemic caused only a short-term disruption in the financial sector.

Keywords: 1918 influenza, pandemics, financial stability, bank lending, economic recovery

JEL Classification: E32, G21, N22

Suggested Citation

Anderson, Haelim and Chang, Jin-Wook and Copeland, Adam M., The Effect of the Central Bank Liquidity Support during Pandemics: Evidence from the 1918 Influenza Pandemic (May 2020). FRB of New York Staff Report No. 928, Available at SSRN: https://ssrn.com/abstract=3613850 or http://dx.doi.org/10.2139/ssrn.3613850

Haelim Anderson

Government of the United States of America – Federal Deposit Insurance Corporation ( email )

550 17th Street NW
Washington, DC 20429
United States

Jin-Wook Chang

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC DC 20551
United States
202-475-6307 (Phone)

HOME PAGE: http://sites.google.com/site/jinwookbchang/home

Adam M. Copeland (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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