Suspensions of payments and their consequences

Abstract

Ongoing financial innovation raises the specter of banking and payment crises. Little aggregate evidence exists on the repercussions of substantial suspensions of payments. State-level experiments fill this gap. Four times in the last forty years, U.S. governors suspended payments from state-insured depositories. Rhode Island’s deposits crisis (1991), which was large, prolonged, and occurred during a recession, substantially lengthened and deepened the downturn. Deposits freezes in Nebraska (1983), Ohio (1985), and Maryland (1985), which were short and occurred during expansions, had little macroeconomic impact. Data sparsity inhibits analysis of these events with standard methods. To perform inference, we develop a novel Bayesian method for synthetic control, which generates output useful for policymakers and theorists. Our findings suggest policies that ensure institutions continue to process payments on a business-as-usual basis at all times have substantial value.