PDFDownload paper RWP 20-10, September 2020

Payment system shutdowns during contractions can scar economies. In the previous 40 years, state governors temporarily suspended payments from state-insured financial institutions four times. Suspensions in Nebraska (1983), Ohio (1985), and Maryland (1985) occurred during expansions and had little measurable effects on macroeconomic aggregates. Rhode Island’s suspension (1991) occurred during a recession and lengthened and deepened the downturn. Unemployment increased. Output declined, possible permanently relative to what might have been. We document these effects using a novel Bayesian approach that characterizes the key types of uncertainty in estimating and interpreting counterfactual and synthetic controls. Our findings suggest that policies ensuring that banks continue to process payments during contractions—including the 2008 bailouts of financial institutions and the unprecedented support of the financial system during the COVID-19 crisis—have substantial value.

JEL Classification: E51, E52, E58, G18, G21

Article Citation

  • Chen, Qian, Christoffer Koch, Gary Richardson, and Padma Sharma. 2020. “Payments Crises and Consequences.” Federal Reserve Bank of Kansas City, Research Working Paper no. 20-10, September. Available at External Linkhttps://doi.org/10.18651/RWP2020-10

Author

Padma Sharma

Economist

Padma Sharma is an Economist at the Federal Reserve Bank of Kansas City. She joined the Economic Research Department in July 2019. Prior to joining the department, she completed …