Alternative central bank credit policies for liquidity provision in a model of payments
I explore alternative central bank policies for liquidity provision in a model of payments. I use a mechanism design approach so that agents' incentives to default are explicit and contingent on the credit policy designed. In the first policy, the central bank invests in costly enforcement and charges an interest rate to recover costs. I show that the second best solution is not distortionary. In the second policy, the central bank requires collateral. If collateral does not bear an opportunity cost, then the solution is first best. Otherwise, the second best is distortionary because collateral serves as a binding credit constraint.
|Date of creation:||2005|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.federalreserve.gov/
More information through EDIRC
|Order Information:||Web: http://www.federalreserve.gov/pubs/feds/fedsorder.html|
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.:
- Angelini, Paolo, 1998. "An analysis of competitive externalities in gross settlement systems," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 1-18, January.
- Kobayakawa, Shuji, 1997. "The Comparative Analysis of Settlement Systems," CEPR Discussion Papers 1667, C.E.P.R. Discussion Papers.
- Jeffrey M. Lacker, 1998.
"Collateralized debt as the optimal contract,"
98-04, Federal Reserve Bank of Richmond.
- Freeman, Scott, 1999. "Rediscounting under aggregate risk," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 197-216, February.
- Antoine Martin, 2002.
"Optimal pricing of intra-day liquidity,"
Research Working Paper
RWP 02-02, Federal Reserve Bank of Kansas City.
- Narayana R. Kocherlakota, 1996.
"Money is memory,"
218, Federal Reserve Bank of Minneapolis.
- Jeffrey Lacker, 2001.
"Online Appendix to Collateralized Debt as the Optimal Contract,"
lacker01, Review of Economic Dynamics.
- Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, vol. 86(5), pages 1126-38, December.
- Charles M. Kahn & William Roberds, 1999.
"Real-time gross settlement and the costs of immediacy,"
98-21, Federal Reserve Bank of Atlanta.
- Kahn, Charles M. & Roberds, William, 2001. "Real-time gross settlement and the costs of immediacy," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 299-319, April.
- Jean-Charles Rochet & Jean Tirole, 1996.
"Controlling risk in payment systems,"
Board of Governors of the Federal Reserve System (U.S.), pages 832-869.
- Ruilin Zhou, 2000. "Understanding intraday credit in large-value payment systems," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 29-44.
- Bech, Morten L. & Garratt, Rod, 2001.
"The Intraday Liquidity Management Game,"
University of California at Santa Barbara, Economics Working Paper Series
qt0m6035wg, Department of Economics, UC Santa Barbara.
- 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.
- Townsend, Robert M, 1989. "Currency and Credit in a Private Information Economy," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1323-44, December.
When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2005-55. 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: (Kris Vajs)
If references are entirely missing, you can add them using this form.