Costly banknote issuance and interest rates under the national banking system
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.
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- Bruce A. Champ & Neil Wallace & Warren E. Weber, 1992. "Resolving the national bank note paradox," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 13-21.
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- Kuehlwein, Michael, 1992. "The National Bank Note Controversy Reexamined," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(1), pages 111-126, February.
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"Interest rates under the U.S. national banking system,"
Journal of Monetary Economics,
Elsevier, vol. 34(3), pages 343-358, December.
- Bruce Champ & Neil Wallace & Warren Weber, 1993. "Interest Rates Under the U.S. National Banking System," Economic History 9310001, EconWPA.
- Bruce A. Champ & Neil Wallace & Warren E. Weber, 1993. "Interest rates under the U.S. national banking system," Staff Report 161, Federal Reserve Bank of Minneapolis.
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- Bruce A. Champ & Scott Freeman & Warren E. Weber, 1999. "Redemption costs and interest rates under the U.S. National Banking System," Proceedings, Federal Reserve Bank of Cleveland, pages 568-595.
- Champ, Bruce & Freeman, Scott & Weber, Warren E, 1999. "Redemption Costs and Interest Rates under the U.S. National Banking System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 568-589, August.
- James, John A, 1976. "The Conundrum of the Low Issue of National Bank Notes," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 359-367, April. Full references (including those not matched with items on IDEAS)