We investigate the role of forward-looking financial factors in propagating the Great Depression. We find that a new hand-collected bank stock index is better at predicting the onset of the Great ...Depression than the aggregate stock market or failed bank deposits. The bank stock index explains almost one-third of the fluctuations in industrial production after five years. Analysis disaggregated at each Federal Reserve district shows that bank stocks capture forward-looking information about debt defaults and credit. Our results suggest that future studies of the credit channel during the Great Depression should incorporate bank stocks to better identify the impact of credit crunches on economic activity.
Stock return volatility during the Great Depression has been labeled a “volatility puzzle” because the standard deviation of stock returns was 2 to 3 times higher than any other period in American ...history. We investigate this puzzle using a new series of building permits and leverage. Our results suggest that volatility in building permit growth and financial leverage largely explain the high level of stock volatility during the Great Depression. Markets factored in the possibility of a forthcoming economic disaster.
Supersanctions and sovereign debt repayment Mitchener, Kris James; Weidenmier, Marc D.
Journal of international money and finance,
02/2010, Letnik:
29, Številka:
1
Journal Article
Recenzirano
Odprti dostop
What might happen if a third-party entity had the power to implement fiscal reforms and/or punish sovereign debt defaulters? In contrast to recent history, extreme sanctions such as gunboat diplomacy ...and “fiscal house arrest” were used to punish debt defaulters during the period 1870–1913. We find that, after a “supersanction” was imposed, a country improved its fiscal discipline. As a result,
ex ante default probabilities on new issues fell dramatically and the country spent no additional time in default. Our results suggest some type of external fiscal or monetary control may be effective in imposing discipline on serial debt defaulters.
America's First Great Moderation Davis, Joseph; Weidenmier, Marc D.
The Journal of economic history,
12/2017, Letnik:
77, Številka:
4
Journal Article
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Odprti dostop
We identify the longest expansion in U.S. history, a recession-free 16-year period from 1841 to 1856 that we call America's First Great Moderation. Using newer data on industrial production, we show ...that the record-long expansion was primarily driven by a boom in transportation-goods investment following the discovery of gold in California. Furthermore, the low volatility of industrial production and stock returns during the First Great Moderation, which occurred during a period without a U.S. central bank, is similar to that observed for the Second Great Moderation (1984–2007).
We develop a method to estimate which side will win a civil war using data from international financial markets. The key insight we deliver is that, for typical sovereign debt contracts, the ...probability of debt repayment will equal the probability of victory in a civil war. We test our predictor for standard outcomes in civil wars, including when the incumbent government loses (the Chinese Nationalists), when a new government is installed by a foreign power and decides to repudiate debt (the restoration of Ferdinand VII of Spain), and when there is a secession (the U.S. Confederacy). For China, markets were predicting a Communist victory three years before it happened. For the U.S., markets never gave the South much more than a 40 percent chance of maintaining the Confederacy. For Spain, markets considered the restoration of Ferdinand VII as likely (probabilities above 50%) as soon as France declared its intention to send military forces to the area.
We use a standard metric from international finance, the currency risk premium, to assess the credibility of fixed exchange rates during the classical gold standard era. Theory suggests that a ...completely credible and permanent commitment to join the gold standard would have zero currency risk or no expectation of devaluation. We find that, even five years after a typical emerging-market country joined the gold standard, the currency risk premium averaged at least 220 basis points. Fixed-effects, panel-regression estimates that control for a variety of borrower-specific factors also show large and positive currency risk premia. In contrast to core gold standard countries, such as France and Germany, the persistence of large premia, long after gold standard adoption, suggest that financial markets did not view the pegs in emerging markets as credible and expected that they devaluation.
We use the founding of the Federal Reserve to identify the effects of a lender of last resort. We examine stock return and interest rate volatility during September and October, when markets were ...vulnerable because of financial stringency from the harvest. Stock volatility fell by 40% and interest rate volatility by more than 70% following the monetary regime change. The drop is insignificant if major panic years are omitted from the analysis, however. Because business cycle downturns occurred in the same year as financial crises, our results suggest that the existence of the Federal Reserve reduced liquidity risk.
Trade and Empire Mitchener, Kris James; Weidenmier, Marc
The Economic journal (London),
November 2008, Letnik:
118, Številka:
533
Journal Article
Recenzirano
We employ a new database of over 21,000 bilateral trade observations from 1870-1913 to assess the contemporaneous effects of empire on trade. Our analysis shows that belonging to an empire roughly ...doubled trade relative to those countries that were not part of an empire. The use of a common language, the establishment of currency unions, the monetisation of recently acquired colonies, and the establishment of preferential trade agreements and customs unions help to account for the observed increase in trade associated with empire.
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