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The paradox of interest rates of the Greenback Era: A reexamination

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  • Zhylyevskyy, Oleksandr
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    Abstract

    The two leading explanations for the counterintuitive behavior of interest rates during the Greenback Era (1862-1878) - the resumption expectations model of Calomiris (1988) and the capital flow argument of Friedman and Schwartz (1963) - are inconsistent with each other in terms of their treatment of financial arbitrage. A methodology to identify unexploited arbitrage opportunities in financial data is proposed. Observable returns strongly suggest that the money market of the Greenback Era did not systematically admit arbitrage, except possibly around the times of the Gold Corner of 1869 and the Panic of 1873, which implies that Calomiris provides a more plausible explanation.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Monetary Economics.

    Volume (Year): 57 (2010)
    Issue (Month): 8 (November)
    Pages: 1026-1037

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    Handle: RePEc:eee:moneco:v:57:y:2010:i:8:p:1026-1037

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    Web page: http://www.elsevier.com/locate/inca/505566

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    1. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
    2. Michie, Ranald C., 1986. "The London and New York Stock Exchanges, 1850–1914," The Journal of Economic History, Cambridge University Press, vol. 46(01), pages 171-187, March.
    3. Lars Peter Hansen & Ravi Jagannathan, 1990. "Implications of security market data for models of dynamic economies," Discussion Paper / Institute for Empirical Macroeconomics 29, Federal Reserve Bank of Minneapolis.
    4. Harrison, J. Michael & Pliska, Stanley R., 1981. "Martingales and stochastic integrals in the theory of continuous trading," Stochastic Processes and their Applications, Elsevier, vol. 11(3), pages 215-260, August.
    5. Roll, Richard, 1972. "Interest Rates and Price Expectations During the Civil War," The Journal of Economic History, Cambridge University Press, vol. 32(02), pages 476-498, June.
    6. Calomiris, Charles W, 1994. "Price and Exchange Rate Determination during the Greenback Suspension," Oxford Economic Papers, Oxford University Press, vol. 46(2), pages 344, April.
    7. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    8. Davis, George K. & Pecquet, Gary M., 1990. "Interest Rates in the Civil War South," The Journal of Economic History, Cambridge University Press, vol. 50(01), pages 133-148, March.
    9. Field, Alexander James, 1983. "Land Abundance, Interest/Profit Rates, and Nineteenth-Century American and British Technology," The Journal of Economic History, Cambridge University Press, vol. 43(02), pages 405-431, June.
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