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Crises Before and After the Creation of the Fed

By Elias and Òscar Jordà


The Federal Reserve was created 100 years ago in response to the harsh recession associated with the Panic of 1907. Comparing that recession with the Great Recession of 2007–09 suggests the Fed can mitigate downturns to some extent. A statistical analysis suggests that if a central bank had lowered interest rates during 1907 panic the same way the Fed did during the 2008 financial crisis, gross domestic product would have contracted two percentage points less than it actually did. This year marks the 100th anniversary of the Federal Reserve System. Two of the Fed’s main duties are acting as lender of last resort in times of crisis, and promoting stable prices and full employment through monetary policy. Few would challenge the Fed’s recent record at controlling inflation. But many question the effectiveness of the Fed’s emergency response to the 2007–08 financial crisis and the recession associated with it. The Federal Reserve was itself born out of the Panic of 1907, a financial crisis that bears a striking resemblance to the one that occurred almost exactly 100 years later. This Economic Letter examines the Fed’s crisis management response in this historical context. The more things change, the more they stay the same Can you identify when the following events took place? Early in the year, the stock of a nonbank financia

Year: 2013
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