Can Interest‐Bearing Money Circulate? A Small‐Denomination Arkansan Experiment, 1861–63

Legal restrictions theory suggests that dominance of non-interest-bearing currency is possible only because legal impediments prevent financial institutions from offering interest-bearing alternatives. A viable interest-bearing medium must be issued in denominations low enough for day-to-day use, however, and without historical examples of small-denomination interest-bearing issues we cannot properly test whether interest-bearing currency will circulate as legal restrictions theory predicts. Civil War Arkansas offers a rare instance where large quantities of small-denomination interest-bearing money were actually issued, mostly below $5. The results of this Arkansan experiment show that small-denomination interest-bearing issues can indeed function as the primary medium of exchange.     

Compensating Financial Experts

We propose a labor market model in which financial firms compete for a scarce supply of workers who can be employed as either bankers or traders. While hiring bankers helps create a surplus that can be split between a firm and its trading counterparties, hiring traders helps the firm appropriate a greater share of that surplus away from its counterparties. Firms bid defensively for workers bound to become traders, who then earn more than bankers. As counterparties employ more traders, the benefit of employing bankers decreases. The model sheds light on the historical evolution of compensation in finance.     

Orderly exits from adjustable pegs and exchange rate bands

This paper examines the exit process from adjustable pegs and exchange rate bands, and the role of capital flows in these exits. It dwells on the experience of various countries, including Chile, Colombia, Egypt, Israel, India, Poland, and Yemen. It begins by identifying conditions under which exits are sought. Next, it discusses the prerequisites for a successful exit, factors affecting the pace of exit, and the nature of the post‐exit regime. It then examines the behavior of private capital flows, interest rates, and official reserves before and after three successful exits (Chile, India, and Poland), and draws broad policy lessons.     

Too Big to Be Efficient? The Impact of Implicit Subsidies on Estimates of Scale Economies for Banks

We examine whether “too‐big‐to‐fail” (TBTF) factors affect estimates of scale economies for large banks. From a standard model of bank production that does not control for any TBTF factors, we find evidence of scale economies for our sample of large banks. We then control for TBTF factors by using a measure of the “implicit subsidy” that emerges from a reduction in TBTF banks’ funding costs due to investor expectations of government support. We do this in two ways: first, we estimate scale economies from an augmented model of bank production that employs a proxy for the counterfactual price of debt that banks would face in the absence of any TBTF funding cost advantage; second, we estimate scale economies from a model of bank production that is estimated only for a sample of banks considered unlikely to be TBTF. After controlling for TBTF factors using either method, we no longer find evidence of scale economies for our sample of large banks. These results suggest that estimated scale economies for large banks are affected by TBTF factors.     

The Effects of Financial Education on the Financial Knowledge of High School Students

This study investigated the effects of a financial education program on high school students' knowledge of personal finance. A comparison of pretest and posttest scores achieved on a reliable and valid thirty-item instrument suggested that the Financing Your Future curriculum increased financial knowledge across many concepts. The scores increased regardless of the course in which the curriculum was used and across student characteristics. The assessment contributes to the growing literature showing that a well-specified and properly implemented program in financial education can positively and significantly influence the financial knowledge of high school students.