The 6 reference contexts in paper Eugene White, Frederic Mishkin (2002) “U.S.Stock Market Crashes and Their Aftermath: Implications for Monetary Policy” / RePEc:rut:rutres:200208

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    5161
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    A stock market crash when balance sheets are initially weak increases adverse selection in credit markets because net worth of firms falls to very low levels (or may even be negative) and no longer functions as good collateral for loans. As pointed out in
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    Calomiris and Hubbard (1990) and Greenwald and Stiglitz (1988),
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    this worsens the adverse selection problem because the potential loss from loan defaults are higher, leaving the lender uncertain about whether a borrower is a poor credit risk. Uncertainty, which often accompanies a stock market crash in the form of increased volatility of asset prices, will also make it more difficult for lenders to screen out good from bad borrowers.
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    Knickerbocker was then forced to suspend payment on October 22, creating a banking panic first in New York and then throughout the country. A nationwide suspension of specie payments to depositors quelled the panic and payments were not resumed until January 1908
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    (Sprague, 1910,
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    Friedman and Schwartz, 1963, Mishkin, 1991, Wicker, 2000). The clearinghouses in New York and other cities began to issue clearinghouse loan certificates, a partial substitute for high power money, in late October 1907.
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    In March 1907, the price of Union Pacific shares, which were widely used to collateralize finance bills, fell by 50 points in less than two weeks. Then in June, New York City’s new bond offering of $29 million failed with only $2 million being purchased
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    (Sprague, 1910).
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    In general, as seen in Figure 2, most of the increase in the spread occurred in advance of the banking panic, although there was a sharp increase in October and November. Once the stock market began to rebound, the risk premium started to decline, in advance of the economic recovery.
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    The continued decline in the stock market from 1930 through early 1933 reflected the economy’s policy-aggravated slide into depression. The collapsing economy placed enormous stress on the banking system. The banking crises of 1930, 1931 and 1933 undermined intermediation (Friedman and Schwartz, 1963; and
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    Bernanke, 1983,
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    Mishkin, 1991), contributing further to the decline of the economy. In these circumstances, risk premiums soared, as seen in Figure 4, as lenders fled from risky borrowers. 10 The stock market collapse beginning in 1929 shows in high relief the importance of the two factors we have identified.
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    Indeed, a regime of flexible inflation targeting, which is what all so-called inflation targeters actually pursue (see Bernake, Laubach, Mishkin and Posen, 1999), is consistent with this type of optimal monetary policy
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    (Svensson, 1999).
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    Also Bernanke and Gertler (1999) have shown that a regime of flexible inflation targeting is likely to make financial instability less likely and to be stabilizing in the presence of asset price bubbles.
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    A focus on financial instability also implies that central banks will respond to disruptions in the financial markets even if the stock market is not a major concern. For example, as described in
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    Maisel (1973),
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    Brimmer (1989) and Mishkin (1991), the Fed responded aggressively to prevent a financial crisis after the Penn-Central bankruptcy in June 1970 without much concern for developments in the stock market even though it had an appreciable decline from its peak in late 1968.
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