THE MACROECONOMIC CONSEQUENCES OF BANK FAILURES UNDER THE NATIONAL BANKING SYSTEM

This paper studies the macroeconomic effects of bank failures during the National Banking era, highlighting the channels through which failures affected aggregate economic activity. The analysis attempts to distinguish between monetarist and nonmonetarist views of the interaction between the real and financial sectors of the economy. Simulations suggest that a relatively small bank failure shock could lead to a 2% decline in real GNP, while the consequences of a large bank failure shock-a one-fifth decline in GNP-could be catastrophic. © 1993 Academic Press. All rights reserved.