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A model of banknote discounts

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Author Info

  • Laurence Ales

    ()
    (Economics University of Minnesota)

  • Francesca Carapella
  • Pricila Maziero
  • Warren Weber

Abstract

Prior to 1863, state chartered banks in the United States issued notes -- dollar-denominated promises to pay specie to the bearer on demand. Although these notes circulated at par locally, they usually were quoted at the discount outside the local area. These discounts varied by both the location of the bank and the location where the discount was being quoted. Further, these discounts were asymmetric across locations in the sense that the discounts quoted in location A on the notes of banks in location B generally differed from the discounts quoted in location B on the notes of banks in location A. Also, discounts generally increased when banks suspended payments on their notes. In this paper we construct a random matching model to qualitatively match these facts about banknote discounts. To attempt to account for locational differences the model has agents that come from two distinct locations. Each locations also has bankers that can issue notes. Banknotes are accepted in exchange because banks are required to produce when a banknote is presented for redemption and their past actions are public information. The overall performance of the model is quite good. Overall the model delivers predictions consistent with the behavior of discounts

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 681.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:681

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Keywords: banks; random matching; banknotes;

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  1. Kennan,J., 2001. "Uniqueness of positive fixed points for increasing concave functions on Rn : an elementary result," Working papers 2, Wisconsin Madison - Social Systems.
  2. Gorton, Gary, 1999. "Pricing free bank notes," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 33-64, August.
  3. Shi Shougong, 1995. "Money and Prices: A Model of Search and Bargaining," Journal of Economic Theory, Elsevier, vol. 67(2), pages 467-496, December.
  4. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 118-41, February.
  5. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "A model of private bank-note issue," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 104-136, January.
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Cited by:
  1. Williamson, Stephen D. & Wright, Randall, 2010. "New Monetarist Economics: Models," MPRA Paper 21030, University Library of Munich, Germany.
  2. Kocherlakota, Narayana & Wright, Randall, 2008. "Introduction to monetary and macro economics," Journal of Economic Theory, Elsevier, vol. 142(1), pages 1-4, September.

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