Pegxit Pressure: Evidence from the Classical Gold Standard

We develop a simple model that highlights the costs and benefits of fixed exchange rates as they relate to trade, and show that negative export-price shocks reduce fiscal revenue and increase the likelihood of an expected currency devaluation. Using a new high-frequency data set on commodity-price movements from the classical gold standard era, we then show that the model’s main prediction holds even for the canonical example of hard pegs. We identify a negative causal relationship between export-price shocks and currency-risk premia in emerging market economies, indicating that negative export-price shocks increased the probability that countries abandoned their pegs

Does "skin in the game" reduce risk taking? Leverage, liability and the long-run consequences of new deal financial reforms

We examine how the Banking Acts of the 1933 and 1935 and related New Deal legislation influenced risk taking in the financial sector of the U.S. economy. Our analysis focuses on contingent liability of bank owners for losses incurred by their firms and how the elimination of this liability influenced leverage and lending by commercial banks. Using a new panel data set that compares balance sheets of state and national banks, we find contingent liability reduced risk taking, particularly when coupled with rules requiring banks to join the Federal Deposit Insurance Corporation. Leverage ratios are higher in states with limited liability for bank owners. Banks in states with contingent liability converted each dollar of capital into fewer loans, and thus could sustain larger loan losses (as a fraction of their portfolio) than banks in limited liability states. The New Deal replaced a regime of contingent liability with stricter balance sheet regulation and increased capital requirements, shifting the onus of risk management from banks to state and federal regulators. By separating investment banks from commercial banks, the Glass-Steagall Act left investment banks to manage their own leverage, a feature of financial regulation that, in part, depended on their partnership structur

Capital Market Integration in Japan

We construct new quarterly estimates of lending rates for the 47 Japanese prefectures for the period 1886-1922, and test the extent to which regional capital markets integrated during this period. We analyze whether the Japanese capital market was efficient, estimate the speed of convergence among the rates, and assess the degree to which different regions were integrated with the main financial centers of Japan. Interest rate differentials between the financial centers of Japan and other regions do not follow a random walk, and hence are suggestive of market efficiency-in the sense that arbitrage opportunities did not persist. Results from cointegration tests suggest that the integration in Japan is characterized by multiple stochastic elements. We find the existence of four long-run cointegrating relationships. We also find evidence that shocks occurring in a financial center, such as the Kanto region in which Tokyo is located, were transmitted to outlying regions and had permanent but small effects on their rates.Financial market development; Capital market integration; Economic integration; Japanese banks

Branch Banking, Bank Competition, and Financial Stability

It is often argued that branching stabilizes banking systems by facilitating diversification of bank portfolios; however, previous empirical research on the Great Depression offers mixed support for this view. Analyses using state-level data find that states allowing branch banking had lower failure rates, while those examining individual banks find that branch banks were more likely to fail. We argue that an alternative hypothesis can reconcile these seemingly disparate findings. Using data on national banks from the 1920s and 1930s, we show that branch banking increases competition and forces weak banks to exit the banking system. This consolidation strengthens the system as a whole without necessarily strengthening the branch banks themselves. Our empirical results suggest that the effects that branching had on competition were quantitatively more important than geographical diversification for bank stability in the 1920s and 1930s.

Branch Banking as a Device for Discipline: Competition and Bank Survivorship During the Great Depression

Because California was a pioneer in the development of intrastate branching, we use its experience during the 1920s and 1930s to assess the effects of the expansion of large-scale, branch-banking networks on competition and the stability of banking systems. Using a new database of individual bank balance sheets, income statements, and branch establishment, we examine the characteristics that made a bank a more likely target of a takeover by a large branching network, how incumbent unit banks responded to the entry of branch banks, and how branching networks affected the probability of survival of banks during the Great Depression. We find no evidence that branching networks expanded by acquiring "lemons"; rather those displaying characteristics of more profitable institutions were more likely targets for acquisition. We show that incumbent, unit banks responded to increased competition from branch banks by changing their operations in ways consistent with efforts to increase efficiency and profitability. Results from survivorship analysis suggest that unit banks competing with branch bank networks, especially with the Bank of America, were more likely to survive the Great Depression than unit banks that did not face competition from branching networks. Our statistical findings thus support the hypothesis that branch banking produces an externality in that it improves the stability of banking systems by increasing competition and forcing incumbent banks to become more efficient.

Capital controls and recovery from the financial crisis of the 1930s

We examine the first widespread use of capital controls in response to a global or regional financial crisis. In particular, we analyze whether capital controls mitigated capital flight in the 1930s and assess their causal effects on macroeconomic recovery from the Great Depression. We find evidence that they stemmed gold outflows in the year following their imposition; however, time-shifted, difference-indifferences (DD) estimates of industrial production, prices, and exports suggest that exchange controls did not accelerate macroeconomic recovery relative to countries that went off gold and floated. Countries imposing capital controls also appear to perform similar to the gold bloc countries once the latter group of countries finally abandoned gold. Time series regressions further demonstrate that countries imposing capital controls refrained from fully utilizing their newly acquired monetary policy autonomy. Even so, capital controls remained in place as instruments for manipulating trade flows and for preserving foreign exchange for the repayment of external debt

CAPITAL MARKET INTEGRATION IN JAPAN

We construct new quarterly estimates of lending rates for 47 Japanese prefectures for the period 1886-1922, and test the extent to which regional capital markets integrated during this period. We analyze whether the capital market was efficient, estimate the speed of convergence among the rates, and assess the degree to which different regions were integrated with the main financial centers of Japan. Interest-rate differentials between the financial centers of Japan and other regions do not follow a random walk, and hence are suggestive of market efficiency ? in the sense that arbitrage opportunities did not persist. Results from cointegration tests suggest that the integration in Japan is characterized by multiple stochastic elements. We find the existence of four long-run cointegrating relationships. We also find evidence that shocks occurring in a financial center, such as the Kanto region, were transmitted to outlying regions and had permanent, but small effects on their rates.Financial Market Development, Capital Market Integration, Economic Integration, Japanese Banks

The Productivity of U.S. States Since 1880

This study identifies the determinants of interstate variation in labor productivity levels at twenty-year intervals between 1880 and 1980. Focusing on fundamental rather than proximate influences, we find that institutional characteristics, physical geography, and resource abundance can account for a high proportion of the differences in state productivity levels. States with navigable waterways, a large minerals endowment, and no slaves in 1860, on average, had higher labor productivity levels throughout the sample period. No consistent support was found for two other influences given prominence in cross-country analyses of differences in incomes or productivity levels: climate and the quality of government.economic growth, productivity levels, slavery, natural resources

Searching for Irving Fisher

There is a long-standing debate as to whether the Fisher effect operated during the classical gold standard period. We break new ground on this question by developing a market-based measure of inflation expectations during the gold standard. We derive a measure of silver-gold inflation expectations using the interest-rate differential between Austrian silver and gold perpetuity bonds. Our use of the silver-gold interest rate differential is motivated by the fact that both gold and silver served as numeraires in the pre-WWI period, so that a change in the price of either precious metal would impact the prices of all goods and services. The empirical evidence suggests that silver-gold inflation expectations exhibited significant persistence at the weekly, monthly, and annual frequencies. Further, we find that there is a one-to-one relationship between silver-gold inflation expectations and the interest rate on Austrian perpetuity bonds that were denominated in paper currency. The analysis suggests the operation of a Fisher effect during the classical gold standard period

The Productivity of U.S. States Since 1880

This study uses state-level variation in labor productivity levels at twenty-year intervals between 1880 and 1980 to examine the relative importance of institutional and geographical influences in explaining observed and persistent differences in standards of living over time and across regions. Focusing on fundamental rather than proximate influences, we find that both institutional characteristics and some physical geography characteristics account for a high proportion of the differences in state productivity levels: states with navigable waterways, a large minerals endowment, and no slaves in 1860, on average, had higher labor productivity levels throughout the sample period. However, we find little support for two other influences that have previously received attention climate and latitude.