Costly banknote issuance and interest rates under the U.S. national banking system
By: Antoine Martin, Cyril Monnet, and Warren E. Weber.
Contributors: Monnet, Cyril.; Weber, Warren E.; Federal Reserve Bank of Minneapolis. Research Dept.
Series: Working paper / Federal Reserve Bank of Minneapolis, Research Dept. ;; 601; Working paper (Federal Reserve Bank of Minneapolis : Online) ;; 601.
Publisher: Federal Reserve Bank of Minneapolis
Published: 2000
Place of publication: [Minneapolis, Minn.]
Language: eng
Format: Electronic resource
Subjects: Bank notes -- United States.; Interest rates -- United States.; Banks and banking, American.
Description: "The behavior of interest rates under the U.S. National Banking System is puzzling because of the apparent presence of persistent and large unexploited arbitrage opportunities for note issuing banks.  Previous attempts to explain interest rate behavior have relied on the cost or the inelasticity of note issue.  These attempts are not entirely satisfactory.  Here we propose a new rationale to solve the puzzle.  Inelastic note issuance arises endogenously because the marginal cost of issuing notes is an increasing function of circulation.  We build a spatial separation model where some fraction of agents must move each period.  Banknotes can be carried between locations; deposits cannot.  Taking the model to the data on national banks, we find it matches the movements in long-term interest rates well.  It also predicts movements in deposit rates during panics.  However, the model displays more inelasticity of notes issuance than is in the data"--Federal Reserve Bank of Minneapolis web site.
Notes: Includes bibliographical references.
Title from abstract page as viewed on 1/4/2005.
"May 2000."
Also available in print.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.