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"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"--Federal Reserve Bank of Minneapolis web site

The International Monetary Fund (IMF) in 2012 cautiously accepted that certain forms of capital controls might be 'useful' for ensuring financial stability and thus a legitimate tool to prevent or forestall crisis. Most commentary on the IMF's new 'Institutional View' has focused on the extent to which the IMF shifted position on capital controls but left unaddressed the more systemic issue involving the IMF's authority in overseeing, regulating and controlling capital movements. The IMF, however, is not specifically tasked with monitoring, regulating or interfering in capital movements. Despite the legal vacuum, the Fund has managed to slowly but steadily seize authority over capital movements in what can only be regarded as an expansion in mandate. While academic commentary on the IMF's role over capital movements is plentiful, legal literature on the Fund's competence on these matters and the expansion in mandate is surprisingly scarce. This article adds a legal element to the literature by assessing to what extent the Fund's unilateral and autonomous decision to expand its scope of operations is compatible with its constitutive instrument – the Articles of Agreement – and whether the Fund's actions are in line with international legal doctrine applicable to international organizations. The article concludes that while the current activities of the Fund go beyond its original operational framework, its decision to expand authority and scope of action is in line with the legal theory on the evolution of an international organization's mandate and necessary in order to fulfil its role in the international financial system.

The nineteenth-century economist Walter Bagehot maintained that in order to prevent bank panics, a central bank should provide liquidity at a very high rate of interest. However, most of the theoretical literature on liquidity provision suggests that central banks should lend at an interest rate of zero. This latter recommendation is broadly consistent with the Federal Reserve's behavior in the days following September 11, 2001. This paper shows that Bagehot's recommendation can be reconciled with the Fed's policy if one recognizes that Bagehot had in mind a commodity money regime in which the amount of reserves available is limited. A high price for this liquidity allows banks that need it most to self-select. To the contrary, the Fed has a virtually unlimited ability to temporarily expand the money supply so that self-selection is unnecessary.