We construct a general equilibrium model in which credit is used as a medium of exchange, and banks participate in a settlement system to finalize their customers' transactions. We study the optimal settlement system design, and find that a trade-off arises endogenously within the model. A higher frequency of settlement and more costly intra-day borrowing policies limit the banks' accumulation of liabilities and promote conservative reserve management, hence limiting the risk of default should a bank fail for any reason. However, such policies also imply higher banking costs, less interest paid on deposits, and less capital allocated by banks to productive investments. After characterizing equilibrium and welfare, we parameterize the economy and analyze how the optimal settlement system policies depend on several features of the economy, including the risk of bank failure, the fragility of the settlement system, the volume of trade by banks' customers, and the rate of return on investments available to banks.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 9 (2009)
Issue (Month): 1 (May)
|Contact details of provider:|| Web page: https://www.degruyter.com|
|Order Information:||Web: https://www.degruyter.com/view/j/bejm|
References listed on IDEAS
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.:
- Bernanke, Ben S, 1990. "Clearing and Settlement during the Crash," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 133-151.
- Martin, Antoine & McAndrews, James, 2010.
"A study of competing designs for a liquidity-saving mechanism,"
Journal of Banking & Finance,
Elsevier, vol. 34(8), pages 1818-1826, August.
- Antoine Martin & James J. McAndrews, 2008. "A study of competing designs for a liquidity-saving mechanism," Staff Reports 336, Federal Reserve Bank of New York.
- Antoine Martin & James J. McAndrews, 2008. "An economic analysis of liquidity-saving mechanisms," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 25-39.
- Narayana R. Kocherlakota, 1996.
"Money is memory,"
218, Federal Reserve Bank of Minneapolis.
- Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, vol. 86(5), pages 1126-1138, December.
- Enghin Atalay & Antoine Martin & James J. McAndrews, 2008. "The welfare effects of a liquidity-saving mechanism," Staff Reports 331, Federal Reserve Bank of New York.
- 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.
- David C. Mills, 2005. "Alternative central bank credit policies for liquidity provision in a model of payments," Finance and Economics Discussion Series 2005-55, Board of Governors of the Federal Reserve System (U.S.).
- David C. Mills, 2004. "Alternative Central Bank Credit Policies for Liquidity Provision in a Model of Payments," Econometric Society 2004 North American Summer Meetings 155, Econometric Society.
- Charles M. Kahn & James J. McAndrews & William Roberds, 1999.
"Settlement risk under gross and net settlement,"
86, Federal Reserve Bank of New York.
- Antoine Martin, 2002.
"Optimal pricing of intra-day liquidity,"
Research Working Paper
RWP 02-02, Federal Reserve Bank of Kansas City.
- Antoine Martin & James J. McAndrews, 2007.
282, Federal Reserve Bank of New York.
- Ricardo de O. Cavalcanti & Neil Wallace, 1999.
"Inside and outside money as alternative media of exchange,"
Federal Reserve Bank of Cleveland, pages 443-468.
- Cavalcanti, Ricardo de O & Wallace, Neil, 1999. "Inside and Outside Money as Alternative Media of Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 443-457, August.
- Ricardo de O. Cavalcanti & Neil Wallace, 1999. "A model of private bank-note issue," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 104-136, January.
- Wallace, Neil, 2001. "Whither Monetary Economics?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 847-869, November.
- Morten L. Bech & Bart Hobijn, 2006.
"Technology diffusion within central banking: the case of real-time gross settlement,"
260, Federal Reserve Bank of New York.
- Morten L. Bech & Bart Hobijn, 2007. "Technology Diffusion within Central Banking: The Case of Real-Time Gross Settlement," International Journal of Central Banking, International Journal of Central Banking, vol. 3(3), pages 147-181, September.
- Freeman, Scott, 1999. "Rediscounting under aggregate risk," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 197-216, February.
- Berger, Allen N & Hancock, Diana & Marquardt, Jeffrey C, 1996.
"A Framework for Analyzing Efficiency, Risks, Costs, and Innovations in the Payments System,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 28(4), pages 696-732, November.
- Allen N. Berger & Diana Hancock & Jeffrey C. Marquardt, 1996. "A framework for analyzing efficiency, risks, costs and innovations in the payments system," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 696-732.
When requesting a correction, please mention this item's handle: RePEc:bpj:bejmac:v:9:y:2009:i:1:n:17. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Golla)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.