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Money and debt in the structure of payments

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  • Edward J. Green

Abstract

In Scott Freeman’s (1996) model, payment system arrangements based on intermediated debt that is settled with money achieve higher welfare than does direct money payment. In a simplified version of Freeman’s model, welfare can be further improved and efficiency achieved by a monetary authority participating in a secondary market for debt or by a private intermediary using a common clearinghouse device. The analysis clarifies that ordinary private agents can assume the role of central bank or clearinghouse; no artificial agent, posited solely to play that role and endowed with special capabilities for it, is necessary. The institutional features required for a central bank or a clearinghouse to achieve efficiency, particularly features related to central bank independence, are discussed informally.

Suggested Citation

  • Edward J. Green, 1999. "Money and debt in the structure of payments," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 13-29.
  • Handle: RePEc:fip:fedmqr:y:1999:i:spr:p:13-29:n:v.23no.2
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    References listed on IDEAS

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    1. 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.
    2. Franklin Allen, Douglas Gale, 1988. "Optimal Security Design," Review of Financial Studies, Society for Financial Studies, pages 229-263.
    3. Masahiro Okuno & Itzhak Zilcha, 1980. "On the Efficiency of a Competitive Equilibrium in Infinite Horizon Monetary Economies," Review of Economic Studies, Oxford University Press, vol. 47(4), pages 797-807.
    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.
    5. Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, pages 1126-1138.
    6. N/A, 1996. "Note:," Foreign Trade Review, , vol. 31(1-2), pages 1-1, January.
    7. 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 1212-1236, December.
    8. 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.
    9. 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.
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    More about this item

    Keywords

    Payment systems;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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