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Money and Debt in the Structure of Payments

  • Edward J. Green

    (Federal Reserve Bank of Minneapolis)

Freeman (1996) formulates a model in which payment arrangements based on intermediated debt that is settled using money can achieve higher welfare than direct money payment achieves. Freeman finds that a monetary authority can sometimes further improve welfare, and achieve efficiency, by participating in a secondary market for debt. The main result of this paper is that a private intermediary can also achieve efficiency by means of novation and substitution, a contractual device widely used by clearinghouses. The features of institutional governance required for either a central bank or a clearinghouse to achieve efficiency, particularly features related to ``central-bank independence,'' are discussed informally.

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Paper provided by EconWPA in its series Macroeconomics with number 9609002.

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Length: 23 pages
Date of creation: 09 Sep 1996
Date of revision: 09 Sep 1996
Handle: RePEc:wpa:wuwpma:9609002
Note: 23 pages, LaTeX.
Contact details of provider: Web page: http://128.118.178.162

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  1. Franklin Allen, Douglas Gale, 1988. "Optimal Security Design," Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 229-263.
  2. 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.
  3. Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, vol. 86(5), pages 1126-38, December.
  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. 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.
  6. 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.
  7. Okuno, Masahiro & Zilcha, Itzhak, 1980. "On the Efficiency of a Competitive Equilibrium in Infinite Horizon Monetary Economies," Review of Economic Studies, Wiley Blackwell, vol. 47(4), pages 797-807, July.
  8. 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 1212-36, December.
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