Preventing A Repeat Of The Money Market Meltdown Of The Early 1930s

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Executive Summary

This paper analyzes the meltdown of the commercial paper market during the Great Depression, and relates those findings to the recent financial crisis. Theoretical models of financial frictions and information problems imply that lenders will make fewer non-collateralized loans or investments and relatively more extensions of collateralized finance in times of high risk premiums. This paper investigates the relevance of such theories to the Great Depression by analyzing whether the increased use of a collateralized form of business lending (bankers acceptances) relative to that of non-collateralized commercial paper can be econometrically attributable to measures of corporate credit/financial risk premiums.

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