Introduction to Differences-in-Differences

MIT's Josh Angrist introduces differences-in-differences with one of the worst economic events in history: the Great Depression.

Economists still argue about the causes of the Great Depression, but most agree that a key piece of the puzzle was an epidemic of bank failures. Over 9,000 banks failed from 1930 to 1933!

Could the Federal Reserve have prevented this catastrophe?

At the time, regional Federal Reserve branches had considerable policy independence. Some branches helped troubled banks with “easy money”. Others did not, following a “tight money” policy.

Metrics wizards Gary Richardson and William Troost used differences-in-differences to analyze a natural experiment in Mississippi, where one half of the state had tight money while the other half had easy. What did they find?

This introduction to differences-in-differences covers the following:

  • Bank failures during the Great Depression
  • Easy versus tight monetary policies; moral hazard
  • Parallel data trends
  • Calculating the treatment effect
  • Assumptions for a valid differences-in-differences analysis

Teacher Resources


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