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Float on a Note

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  • Tao Zhu
  • Neil Wallace
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    Abstract

    From 1863-1914, banks in the U.S. could issue notes subject to full collateral, a per-period tax on outstanding notes, redemption of notes on demand, and a clearing fee per issued note cleared through the Treasury. The system failed to satisfy a purported arbitrage condition; i.e., the yield on collateral exceeded the tax rate plus the product of the clearing fee and the average clearing rate of notes. The failure is explained by a model in which note issuers choose to issue notes only in trades that both produce a low clearing rate (high float) and are subject to diminishing returns

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    Bibliographic Info

    Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 538.

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    Date of creation: 11 Aug 2004
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    Handle: RePEc:ecm:nasm04:538

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    Related research

    Keywords: national banking system; note issuance; float;

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    Cited by:
    1. Charles W. Calomiris & Joseph R. Mason, 2005. "Resolving the puzzle of the underissuance of national bank notes," Working Papers 05-19, Federal Reserve Bank of Philadelphia.

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