A Model of Banknote Discounts

Loading...
Thumbnail Image
Penn collection
Finance Papers
Degree type
Discipline
Subject
Economic Theory
Finance and Financial Management
Funder
Grant number
License
Copyright date
Distributor
Related resources
Author
Ales, Laurence
Carapella, Francesca
Maziero, Pricila
Weber, Warren E
Contributor
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 a 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, meaning 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 location 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. Overall, the model delivers predictions consistent with the behavior of discounts.

Advisor
Date Range for Data Collection (Start Date)
Date Range for Data Collection (End Date)
Digital Object Identifier
Series name and number
Publication date
2008-01-01
Journal title
Journal of Economic Theory
Volume number
Issue number
Publisher
Publisher DOI
Journal Issue
Comments
At the time of publication, author Pricila Maziero was affiliated with the Federal Reserve Bank of Minneapolis and the University of Minnesota. Currently, she is a faculty member at the Wharton School at the University of Pennsylvania.
Recommended citation
Collection