Payments Crises and Consequences

52 Pages Posted: 2 Nov 2020

See all articles by Qian Chen

Qian Chen

Beijing Technology and Business University

Christoffer Koch

Federal Reserve Bank of Dallas

Gary Richardson

University of California, Irvine - Department of Economics

Padma Sharma

Federal Reserve Bank of Kansas City

Multiple version iconThere are 3 versions of this paper

Date Written: August 18, 2020

Abstract

Banking-system shutdowns during contractions scar economies. Four times in the last forty years, governors suspended payments from state-insured depository institutions. Suspensions of payments in Nebraska (1983), Ohio (1985), and Maryland (1985), which were short and occurred during expansions, had little measurable impact on macroeconomic aggregates. Rhode Island’s payments crisis (1991), which was prolonged and occurred during a recession, lengthened and deepened the downturn. Unemployment increased. Output declined, possibly permanently relative to what might have been. We document these effects using a novel Bayesian method for synthetic control that characterizes the principal types of uncertainty in this form of analysis. Our findings suggest policies that ensurebanks continue to process payments during contractions – including the bailouts of financial institutions in 2008 and the unprecedented support of the financial system during the COVID crisis – have substantial value.

JEL Classification: E51, E52, E58, G18, G21

Suggested Citation

Chen, Qian and Koch, Christoffer and Richardson, Gary and Sharma, Padma, Payments Crises and Consequences (August 18, 2020). Federal Reserve Bank of Kansas City Working Paper No. 20-10, Available at SSRN: https://ssrn.com/abstract=3691312 or http://dx.doi.org/10.2139/ssrn.3691312

Qian Chen (Contact Author)

Beijing Technology and Business University

Christoffer Koch

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX Texas 75265-5906
United States

HOME PAGE: http://www.dallasfed.org

Gary Richardson

University of California, Irvine - Department of Economics ( email )

3151 Social Science Plaza
Irvine, CA 92697-5100
United States

Padma Sharma

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198

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