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Payments, credit and asset prices

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  • Monika Piazzesi
  • Martin Schneider

Abstract

This paper studies a modern monetary economy: trade in both goods and securities relies on money provided by intermediaries. While money is valued for its liquidity, its creation requires costly leverage. In ation, security prices and the transmission of monetary policy then depend on the institutional details of the payment system. The price of a security is higher if it helps back inside money, and lower if more inside money is used to trade it. In ation can be low in security market busts if bank portfolios suffer, but also in booms if trading absorbs more money. The government has multiple policy tools: in addition to the return on outside money, it affects the mix of securities used to back inside money.

Suggested Citation

  • Monika Piazzesi & Martin Schneider, 2018. "Payments, credit and asset prices," BIS Working Papers 734, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:734
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    References listed on IDEAS

    as
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    6. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, March.
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    11. Nosal, Ed & Rocheteau, Guillaume, 2011. "Money, Payments, and Liquidity," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262016281, September.
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    Citations

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    Cited by:

    1. Lenel, Moritz & Piazzesi, Monika & Schneider, Martin, 2019. "The short rate disconnect in a monetary economy," Journal of Monetary Economics, Elsevier, vol. 106(C), pages 59-77.
    2. Jakab, Zoltan & Kumhof, Michael, 2018. "Banks are not intermediaries of loanable funds — facts, theory and evidence," Bank of England working papers 761, Bank of England, revised 17 Jan 2020.
    3. Xuan Wang, 2019. "When Do Currency Unions Benefit From Default ?," 2019 Papers pwa938, Job Market Papers.
    4. Lukas Altermatt, 2019. "Bank lending, financial frictions, and inside money creation," ECON - Working Papers 325, Department of Economics - University of Zurich.
    5. Xuan Wang, 2020. "A Macro-Financial Perspective to Analyse Maturity Mismatch and Default," Tinbergen Institute Discussion Papers 20-064/IV, Tinbergen Institute.
    6. Xuan Wang, 2021. "Bankruptcy Codes and Risk Sharing of Currency Unions," Tinbergen Institute Discussion Papers 21-009/IV, Tinbergen Institute.
    7. Kumhof, Michael & Wang, Xuan, 2018. "Banks, money and the zero lower bound on deposit rates," Bank of England working papers 752, Bank of England, revised 19 Nov 2020.

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    More about this item

    Keywords

    payments; monetary policy; liquidity trap; liquidity; asset prices; collateral premium; leverage; leverage costs; convenience yield; banking; scarce reserves; abundant reserves;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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