Payments Crises and Consequences

70 Pages Posted: 26 May 2022

See all articles by Qian Chen

Qian Chen

Beijing Technology and Business University

Christoffer Koch

International Monetary Fund (IMF)

Gary Richardson

University of California, Irvine - Department of Economics

Padma Sharma

Federal Reserve Bank of Kansas City

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Abstract

Ongoing financial innovation raises the specter of payment-system instability. Little aggregate evidence on the repercussions of payment suspensions exists. State-level experiments fill this gap. Four times in the last forty years, U.S. governors suspended payments from state-insured depository institutions. Rhode Island’s payments crisis (1991), which was large, prolonged, and occurred during a recession, substantially lengthened and deepened the downturn. Suspensions of payments in Nebraska (1983), Ohio (1985), and Maryland (1985), which were short and occurred during expansions, had little macroeconomic impact. Data sparsity inhibits analysis of these events with standard methods. To perform inference, we develop a novel Bayesian method for synthetic control which generates output useful for policymakers and theorists. Our findings suggest policies that ensure institutions continue to process payments on a business-as-usual basis at all times have substantial value.

Keywords: Payments crises, Bank suspensions, Synthetic control, Bayesian methods, Recessions, Bailouts

Suggested Citation

Chen, Qian and Koch, Christoffer and Richardson, Gary and Sharma, Padma, Payments Crises and Consequences. Available at SSRN: https://ssrn.com/abstract=4120048 or http://dx.doi.org/10.2139/ssrn.4120048

Qian Chen

Beijing Technology and Business University

Christoffer Koch

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Gary Richardson

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

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

Padma Sharma (Contact Author)

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198

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