Bank Panics, Government Guarantees, and the Long-Run Size of the Financial Sector: Evidence from Free-Banking America

47 Pages Posted: 9 Aug 2012 Last revised: 18 Feb 2014

See all articles by Benjamin Remy Chabot

Benjamin Remy Chabot

Federal Reserve Bank of Chicago

Charles C. Moul

Miami University of Ohio - Department of Economics

Date Written: March 1, 2013

Abstract

Governments often attempt to increase the confidence of financial market participants by making implicit or explicit guarantees of uncertain credibility. Confidence in these guarantees presumably alters the size of the financial sector, but observing the long-run consequences of failed guarantees is difficult in the modern era. We look to America's free-banking era and compare the consequences of a broken guarantee during the Indiana-centered Panic of 1854 to the Panic of 1857 in which guarantees were honored. Our estimates of a model of endogenous market structure indicate substantial negative long-run consequences to financial depth when panics cast doubt upon a government's ability to honor its guarantees.

Keywords: banking panics, government guarantees, leverage cycles, endogenous market structure, economic history

JEL Classification: D53, G21, L11, L13, N21

Suggested Citation

Chabot, Benjamin Remy and Moul, Charles C., Bank Panics, Government Guarantees, and the Long-Run Size of the Financial Sector: Evidence from Free-Banking America (March 1, 2013). Journal of Money, Credit, and Banking, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2127290 or http://dx.doi.org/10.2139/ssrn.2127290

Benjamin Remy Chabot

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Charles C. Moul (Contact Author)

Miami University of Ohio - Department of Economics ( email )

Farmer School of Business
Oxford, OH 45056
United States

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