How economists use the Great Depression to measure policy impact
Between 1930 and 1933, more than 9,000 banks collapsed. This video explores how the 'differences-in-differences' method allows researchers to isolate the effects of monetary policy by studying the divergent paths of regional Federal Reserve branches.
During the Great Depression, various regional branches of the Federal Reserve operated with significant autonomy. While some branches implemented 'easy money' strategies to support struggling institutions, others maintained a 'tight money' approach. This divergence created a unique opportunity for analysis.
By examining a split in Mississippi's monetary policy, researchers Gary Richardson and William Troost applied the differences-in-differences technique to observe the consequences of these opposing strategies. The lesson covers the mechanics of calculating treatment effects, the risks of moral hazard, and the essential assumptions required for a valid analysis.
Source: Introduction to Differences-in-Differences
