Development of the American Economy
March 5, 2016
Peter Koudijs, Stanford University and NBER, and Laura Salisbury, York University and NBER
Koudijs and Salisbury study the impact of the introduction of a form of bankruptcy protection on household investment in the U.S. South in the 1840s, which pre-dated modern bankruptcy laws. During this period, certain southern states passed laws that protected married women's property from seizure in the case of insolvency, amending the common law default which vested a wife's property in her husband and thus allowed it to be seized for the repayment of his debts. Importantly, these laws only applied to newlyweds. The researchers compare couples married after the passage of a law with couples from the same state who married before the passage of a law. Since states passed laws at different points in time, they can exploit variation in protection conditional on state and year of marriage. The authors find that the effect on household investment was heterogeneous: if most household wealth came from the husband (wife), the law led to an increase (decrease) in investment. This is consistent with a simple model where downside protection leads to both an increase in the demand for credit and a reduction in supply. Demand effects will only dominate if a modest fraction of total wealth is protected.
Michael D. Bordo, Rutgers University and NBER, and Arunima Sinha, Fordham University
Bordo and Sinha examine the first QE program through the lens of an open-market operation undertaken by the Federal Reserve in 1932, at the height of the Great Depression. This program entailed large purchases of medium- and long-term securities over a four-month period. There were no prior announcements about the size or composition of the operation, how long it would be put in place, and the program ended abruptly. Using a dataset with weekly-level Treasury holdings of the Federal Reserve in 1932, and the corresponding yields, the researchers first conduct an event study analysis. This indicates that the 1932 program significantly lowered medium- and long-term Treasury yields. They then use a segmented markets model to analyze the channel through which the open-market purchases affected the economy. Quarterly data from 1920-32 is used to estimate the model with Bayesian methods, employing the methodology of Chen, Curdia and Ferrero (2012). The authors find that the significant degree of financial market segmentation in this period made the historical open market purchase operation more effective than QE in stimulating output growth. Additionally, if the Federal Reserve had continued its operations in 1932, and used the announcement strategy of the QE operation, the upturn in economic activity during the Great Depression could have been achieved sooner.
Joseph P. Ferrie, Northwestern University and NBER; Catherine Massey, U.S. Census Bureau; and Jonathan L. Rothbaum, George Washington University
Charles W. Calomiris, Columbia University and NBER, and Matthew S. Jaremski, Colgate University and NBER
Deposit insurance reduces liquidity risk by removing the incentives of depositors to withdraw from banks when concerned about insolvency risk. However, it also can increase insolvency risk by encouraging reckless behavior by insured banks. Unlike modern systems that cover virtually all depository institutions, only a handful of U.S. states installed deposit insurance laws before 1920 and those laws only applied to some depository institutions within those states. Moreover, the dates of the passage and implementation of deposit insurance differ across states, helping control for the circumstances that led to the passage. These experiments present a unique testing ground for investigating the effect of deposit insurance. Calomiris and Jaremski show that deposit insurance increased risk by removing market discipline that had been constraining erstwhile uninsured banks. Insured banks increased their insolvency risk, and competed aggressively for the deposits of uninsured banks operating nearby.
Marianne H. Wanamaker, University of Tennessee and NBER, and Marcella Alsan, Stanford University and NBER
For forty years, the Tuskegee Study of Untreated Syphilis in the Negro Male passively monitored hundreds of adult black males with syphilis despite the availability of effective treatment. The studys methods have become synonymous with exploitation and mistreatment by the medical community. Wanamaker and Alsan find that the historical disclosure of the study in 1972 is correlated with increases in medical mistrust and mortality and decreases in outpatient physician interactions for black men. Blacks possessing prior experience with the medical community, including veterans and women, appear to have been less affected by the disclosure. The researchers' findings relate to a broader literature on how beliefs are formed and the importance of trust for economic exchanges involving asymmetric information.
Katherine Eriksson, University of California at Davis and NBER, and Greg Niemesh, Miami University
The Great Migration of African Americans from the rural South to the urban North entailed a significant change in the health environment, particularly of infants, during a time when access to medical care and public health infrastructure became increasingly important. Eriksson and Niemesh create a new dataset that links individual infant death certificates to parental characteristics to assess the impact of parents' migration to Northern cities on infant mortality. The new dataset allows a number of key innovations. First, the researchers construct infant mortality rates specific to migrants and also for a period (1915-1920) prior to the registration of births in many of the states. Second, the microdata allow them to control for the selection into migration and assess a number of potential mechanisms for the migrant health effect. Conditional on parents' pre-migration observable characteristics and county-of-origin fixed effects, the researchers find that black infants were more likely to die in the North relative to their southern-born counterparts. The authors do not find any evidence of migrant selection. Given that infant health has a long-lasting impact on adult outcomes, the results shed light on whether and how the Great Migration contributed to African Americans' secular gains in health and income during the 20th century.