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Institutional Designs to Alleviate Liquidity Shortages in a Two- Country Model

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  • Hiroshi Fujiki

    (Associate Director-General and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: hiroshi.fujiki@boj.or.jp))

Abstract

Fujiki (2003, 2006) extended the Freeman (1996) model to a two- country model, demonstrating that elastic money supplies in foreign exchange markets and the domestic credit market yield efficiency gains in monetary equilibrium, and that several institutional designs equally achieve the desired elastic money supplies. The present paper considers four institutional designs using a model similar to Fujiki (2003): a combination of central bank discount window policy and the CLS Bank; a central bank intervention both in the domestic credit market and the foreign exchange market; cross-border collateral arrangements; and foreign currency liquidity swap lines. These institutional designs yield the same efficiency gains in our model.

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Bibliographic Info

Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 13-E-07.

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Date of creation: Aug 2013
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Handle: RePEc:ime:imedps:13-e-07

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Keywords: Foreign exchange market; CLS; Cross-border collateral arrangements; Liquidity swap lines;

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  1. Mills, David Jr., 2006. "Alternative central bank credit policies for liquidity provision in a model of payments," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1593-1611, October.
  2. James T. E. Chapman & Antoine Martin, 2007. "Rediscounting under aggregate risk with moral hazard," Staff Reports 296, Federal Reserve Bank of New York.
  3. Fujiki, Hiroshi, 2003. "A model of the Federal Reserve Act under the international gold standard system," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1333-1350, September.
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