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Mechanism Design and the Role of Enforcement in Freeman's Model of Payments

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  • David C. Mills, Jr

    (Board of Governors)

Abstract

Freeman (1996a) is the first to formulate a model in which (i) debts are repaid with money and (ii) there can arise liquidity problems which give rise to a role for a central bank discount window. I ask whether this payment system is truly essential in his model. It is not because there is another mechanism - one which features (i) and (ii) - that works well. This is because of a strong assumption regarding the enforcement of debt contracts. I then present a slightly different model of enforcement based on collateralized lending where (i) is necessary, but (ii) is not. (Copyright: Elsevier)

Suggested Citation

  • 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.
  • Handle: RePEc:red:issued:v:7:y:2004:i:1:p:219-236 DOI: 10.1016/S1094-2025(03)00045-0
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    References listed on IDEAS

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    1. Freeman, Scott, 1996. "Clearinghouse banks and banknote over-issue," Journal of Monetary Economics, Elsevier, pages 101-115.
    2. Freeman, Scott, 1999. "Rediscounting under aggregate risk," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 197-216, February.
    3. Edward J. Green, 1999. "Money and debt in the structure of payments," Quarterly Review, Federal Reserve Bank of Minneapolis, pages 13-29.
    4. Mark Huggett & Stefan Krasa, 1996. "Money and storage in a differential information economy (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 191-209.
    5. N/A, 1996. "Note:," Foreign Trade Review, , vol. 31(1-2), pages 1-1, January.
    6. Huggett, Mark & Krasa, Stefan, 1996. "Money and Storage in a Differential Information Economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 191-210.
    7. Ruilin Zhou, 2000. "Understanding intraday credit in large-value payment systems," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 29-44.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Mills, David Jr., 2006. "Alternative central bank credit policies for liquidity provision in a model of payments," Journal of Monetary Economics, Elsevier, pages 1593-1611.
    2. Gu, Chao & Guzman, Mark & Haslag, Joseph, 2011. "Production, hidden action, and the payment system," Journal of Monetary Economics, Elsevier, pages 172-182.
    3. Kahn, Charles M. & Roberds, William, 2007. "Transferability, finality, and debt settlement," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 955-978, May.
    4. Bhattacharya, Joydeep & Haslag, Joseph H. & Martin, Antoine, 2009. "Why does overnight liquidity cost more than intraday liquidity?," Journal of Economic Dynamics and Control, Elsevier, vol. 33(6), pages 1236-1246, June.
    5. ANTOINE MARTIN & JAMES McANDREWS, 2010. "Should There Be Intraday Money Markets?," Contemporary Economic Policy, Western Economic Association International, vol. 28(1), pages 110-122, January.
    6. James T.E. Chapman & Antoine Martin, 2013. "Rediscounting under Aggregate Risk with Moral Hazard," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(4), pages 651-674, June.
    7. Jonathan Chiu & Alexandra Lai, 2007. "Modelling Payments Systems: A Review of the Literature," Staff Working Papers 07-28, Bank of Canada.
    8. Camera, Gabriele & Vesely, Filip, 2007. "Trading horizons and the value of money," European Economic Review, Elsevier, vol. 51(7), pages 1751-1767, October.
    9. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.
    10. Hajime Tomura, 2014. "Payment Instruments and Collateral in the Interbank Payment System," UTokyo Price Project Working Paper Series 032, University of Tokyo, Graduate School of Economics.

    More about this item

    Keywords

    Payments system; discount window;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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