A model of banknote discounts

Laurence Ales, Francesca Carapella, Pricila Maziero and Warren Weber

No 681, 2006 Meeting Papers from Society for Economic Dynamics

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

Keywords: banks; random matching; banknotes (search for similar items in EconPapers)
JEL-codes: E50 G21 N21 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-ban
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: A model of banknote discounts (2008)
Working Paper: A model of banknote discounts (2006)
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