The Effect of Cash Injections: Evidence from the 1980s Farm Debt Crisis

Abstract

What is the effect of cash injections during financial crises? Exploiting county-level variation arising from random weather shocks during the 1980s Farm Debt Crisis, we analyze and measure the effect of local cash flow shocks on the real and financial sector. We show that such cash flow shocks have significant impact on a host of economic outcomes, including land values, loan delinquency rates, the probability of bank failure, employment, and wages. Estimates of the effect of local cash flow shocks on county income levels during the financial crisis yield a multiplier of 1.63.

Keywords: Financial Crises, Financial Accelerator, Cash-in-the-Market Pricing, Fiscal Multiplier

JEL Classification: D22, D24, D31, E23, E24, E51, G01, G21