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Money and Debt in the Structure of Payments

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Author Info
Green, Edward-J (Federal Reserve Bank of Minneapolis)

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Abstract

Freeman (1996) formulates a model in which arrangements based on intermediated debt that is settled using money achieve higher welfare that direct money payment achieves. A monetary authority can sometimes further improve welfare and achieve efficiency by participating in a secondary market for debt; and a private intermediary can also achieve efficiency by means reminiscent of clearinghouses. These results are derived here in a simplified version of Freeman's model. This analysis clarifies that ordinary private agents in the model are capable of assuming the role of central bank or clearinghouse. An artificial agent, posited solely to play such a role and endowed with special capabilities for it, is unnecessary. The features of institutional governance required for either a central bank or a clearinghouse to achieve efficiency, particularly features related to central bank independence, are discussed informally.

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Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

Volume (Year): 15 (1997)
Issue (Month): 1 (May)
Pages: 63-87
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Handle: RePEc:ime:imemes:v:15:y:1997:i:1:p:63-87

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Find related papers by JEL classification:
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

References listed on IDEAS
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  1. Sargent, Thomas J & Wallace, Neil, 1982. "The Real-Bills Doctrine versus the Quantity Theory: A Reconsideration," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1212-36, December. [Downloadable!] (restricted)
  2. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October. [Downloadable!] (restricted)
  3. Franklin Allen & Douglas Gale, . "Optimal Security Design," Rodney L. White Center for Financial Research Working Papers 26-87, Wharton School Rodney L. White Center for Financial Research.
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  4. Timberlake, Richard H, Jr, 1984. "The Central Banking Role of Clearinghouse Associations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(1), pages 1-15, February. [Downloadable!] (restricted)
  5. Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, vol. 86(5), pages 1126-38, December. [Downloadable!] (restricted)
  6. Radner, Roy, 1972. "Existence of Equilibrium of Plans, Prices, and Price Expectations in a Sequence of Markets," Econometrica, Econometric Society, vol. 40(2), pages 289-303, March. [Downloadable!] (restricted)
  7. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-16. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ricardo Cavalcanti & Andres Erosa & Ted Temzelides, 1998. "Private Money and Reserve Management in a Random Matching Model," Macroeconomics 9803008, EconWPA. [Downloadable!]
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  2. Ed Nosal & Guillaume Rocheteau, 2006. "The economics of payments," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Feb. [Downloadable!]
  3. Charles M. Kahn & James McAndrews & William Roberds, 1999. "Settlement risk under gross and net settlement," Staff Reports 86, Federal Reserve Bank of New York. [Downloadable!]
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  4. Paula Hernandez-Verme, . "International Reserves Crises, Monetary Integration and the Payments System during the International Gold Standard," School of Economics Working Papers EC200904, Universidad de Guanajuato. [Downloadable!]
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  5. Huberto M. Ennis & John A. Weinberg, 2007. "Interest on reserves and daylight credit," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 111-142. [Downloadable!]
  6. Goetz von Peter, 2003. "A Unified Approach to Credit Crunches, Financial Instability, and Banking Crises," Macroeconomics 0312006, EconWPA. [Downloadable!]
  7. Simon Buckle & Erin Campbell, . "Settlement bank behaviour and throughput rules in an RTGS payment system with collateralised intraday credit," Bank of England working papers 209, Bank of England. [Downloadable!]
  8. Antoine Martin & Stacey L. Schreft, 2003. "Currency competition : a partial vindication of Hayek," Research Working Paper RWP 03-04, Federal Reserve Bank of Kansas City. [Downloadable!]
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  9. David C. Mills, Jr, 2004. "Mechanism Design and the Role of Enforcement in Freeman's Model of Payments," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(1), pages 219-236, january. [Downloadable!] (restricted)
  10. David R. Skeie, 2008. "Banking with nominal deposits and inside money," Staff Reports 242, Federal Reserve Bank of New York. [Downloadable!]
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  11. James McAndrews & Samira Rajan, 2000. "The timing and funding of Fedwire funds transfers," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 17-32. [Downloadable!]
  12. Gerald P. Dwyer, Jr. & Margarita Samartín, 2006. "Why do banks promise to pay par on demand?," Working Paper 2006-26, Federal Reserve Bank of Atlanta. [Downloadable!]
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  13. Jeffrey M. Lacker, 1997. "Clearing, settlement, and monetary policy," Working Paper 97-01, Federal Reserve Bank of Richmond. [Downloadable!]
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  14. Charles M. Kahn & William Roberds, . "Payment System Settlement and Bank Incentives," Center for Financial Institutions Working Papers 97-32, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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  15. Scott Freeman, 2002. "Payments and Output," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 602-617, July. [Downloadable!] (restricted)
  16. James T. E. Chapman & Antoine Martin, 2007. "Rediscounting under aggregate risk with moral hazard," Staff Reports 296, Federal Reserve Bank of New York. [Downloadable!]
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  17. James McAndrews & William Roberds, 1999. "Payment intermediation and the origins of banking," Staff Reports 85, Federal Reserve Bank of New York. [Downloadable!]
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  18. James McAndrews & William Roberds, 1999. "A general equilibrium analysis of check float," Staff Reports 84, Federal Reserve Bank of New York. [Downloadable!]
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  19. Hiroshi Fujiki & Edward J. Green & Akira Yamazaki, 1999. "Sharing the risk of settlement failure," Working Papers 594, Federal Reserve Bank of Minneapolis. [Downloadable!]
  20. Charles M. Kahn & William Roberds, 1999. "Real-time gross settlement and the costs of immediacy," Working Paper 98-21, Federal Reserve Bank of Atlanta. [Downloadable!]
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  21. Antoine Martin & James McAndrews, 2008. "Should there be intraday money markets?," Staff Reports 337, Federal Reserve Bank of New York. [Downloadable!]
  22. Jonathan Chiu & Alexandra Lai, 2007. "Modelling Payments Systems: A Review of the Literature," Working Papers 07-28, Bank of Canada. [Downloadable!]
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