Float on a Note

Tao Zhu and Neil Wallace

No 538, Econometric Society 2004 North American Summer Meetings from Econometric Society

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

Keywords: national banking system; note issuance; float (search for similar items in EconPapers)
JEL-codes: E40 (search for similar items in EconPapers)
Date: 2004-08-11
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Citations: View citations in EconPapers (1)

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