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2004), ”Optimal Pricing of Intraday Liquidity
- Journal of Monetary Economics
"... Antoine Martin is an economist at the Federal Reserve Bank of Kansas City. He would like to ..."
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Cited by 30 (10 self)
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Antoine Martin is an economist at the Federal Reserve Bank of Kansas City. He would like to
Real-Time Gross Settlement and the Costs of Immediacy
"... : Using a neoclassical monetary model, we investigate the welfare cost of a payment system that operates as a real-time gross settlement (RTGS) system. We illustrate how the cost of such systems does not ultimately derive from factors such as "payments gridlock" but instead from the credit ..."
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Cited by 28 (3 self)
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: Using a neoclassical monetary model, we investigate the welfare cost of a payment system that operates as a real-time gross settlement (RTGS) system. We illustrate how the cost of such systems does not ultimately derive from factors such as "payments gridlock" but instead from the credit constraints imposed by RTGS. We also investigate the welfare consequences of various approaches to the allocation of daylight credit by central banks. The two most popular approaches, collateralization and charging an administered intraday interest rate, are shown to be effective along some dimensions but flawed in others. JEL classification: E42, G21, N20 Key words: payments, money, real-time gross settlement 1 Real-Time Gross Settlement and the Costs of Immediacy Large-value or wholesale payment systems are a vital component of all developed economies. The two large wholesale payments systems in the U.S., Fedwire and CHIPS, account for $2.6 trillion of transactions daily. Fedwire is used to tr...
Rediscounting under Aggregate Risk with Moral Hazard.” Bank of Canada Working Paper No. 2007-51 and Federal Reserve Bank of New York Staff Report No
, 2007
"... This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in the paper are those of the authors and are not necessarily reflective of views at the Federal Reserve Bank of New Yo ..."
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Cited by 6 (4 self)
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This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in the paper are those of the authors and are not necessarily reflective of views at the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.
Discount window policy, banking crises, and indeterminacy of equilibrium
- Macroeconomic Dynamics
, 2006
"... We study how discount window policy affects the frequency of banking crises, the level of investment, and the scope for indeterminacy of equilibrium. Previous work has shown that providing costless liquidity through a discount window has mixed effects in terms of these criteria: it prevents episodes ..."
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We study how discount window policy affects the frequency of banking crises, the level of investment, and the scope for indeterminacy of equilibrium. Previous work has shown that providing costless liquidity through a discount window has mixed effects in terms of these criteria: it prevents episodes of high liquidity demand from causing crises, but can also lead to indeterminacy of stationary equilibrium and to inefficiently low levels of investment. We show that offering discount-window loans at an above-market interest rate can be unambiguously beneficial. Such a policy generates a unique stationary equilibrium. Banking crises occur with positive probability in this equilibrium and the level of investment is suboptimal, but a proper combination of discount-window and monetary policies can make the welfare effects of these distortions arbitrarily small. We also show that when the specification of the investment technology allows money to serve as an equilibrium store of value, a costless-liquidity policy can eliminate crises without generating indeterminacy. 1 We thank Huberto Ennis for valuable comments. We are deeply indebted to Bruce Smith for his useful comments and for many years of encouragement and support. We gratefully acknowledge financial support from the Weidenbaum Center on the Economy, Government, and Public Policy at Washington University. Part of this work was completed while Keister was visiting the University of Texas at Austin, whose hospitality and support is also gratefully acknowledged. 1
2002) ” Reconciling Bagehot with the Fed’s response to Sept
"... Bagehot (1873) states that in order to prevent bank panics a central bank should provide liquidity to the market at a “very high rate of interest”. This seems to be in sharp contrast with the policy adopted by the Federal Reserve after September 11 when, for a few days, the Federal Funds Rate was ve ..."
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Cited by 4 (0 self)
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Bagehot (1873) states that in order to prevent bank panics a central bank should provide liquidity to the market at a “very high rate of interest”. This seems to be in sharp contrast with the policy adopted by the Federal Reserve after September 11 when, for a few days, the Federal Funds Rate was very close to zero. This paper shows that Bagehot’s recommendation can be reconciled with the Fed’s policy if one recognizes that Bagehot has in mind a commodity money regime so that the amount of reserves available is limited. A high price for this liquidity allows banks that need it most to self-select. In contrast, the Fed has a virtually unlimited ability to temporarily expand the money supply.
Transferability, Finality, and Debt Settlement
, 2002
"... Abstract: The process of payment is fundamental to exchange in a decentralized economy. In production economies, payments often take the form of transfers of inside money, i.e., specialized forms of debt. Associated with each type of inside money is a set of rules that governs both the legitimacy of ..."
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Cited by 1 (1 self)
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Abstract: The process of payment is fundamental to exchange in a decentralized economy. In production economies, payments often take the form of transfers of inside money, i.e., specialized forms of debt. Associated with each type of inside money is a set of rules that governs both the legitimacy of such transfers as means of extinguishing other debts, and the allocation of the ensuing risks. In this paper the authors develop a model of debt as inside money. They focus on an historically important form of payment: “negotiable instruments ” such as the bill of exchange. In a simple mechanism design framework the authors show the advantages of transferable debt over simple chains of credit. The model is then extended to encompass other aspects of negotiability, including “endorsement ” and the rights of a “holder in due course.” JEL classification: E400, G200, K200
Why Emergency Lending Facilities Go Unused *
"... Abstract In recent years, many emergency lending mechanisms have failed to serve their purpose of providing lending of last resort to borrowers in need for liquidity. The reason is that potential borrowers have been reluctant to seek financing, fearing that a request for funds could be seen as a si ..."
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Abstract In recent years, many emergency lending mechanisms have failed to serve their purpose of providing lending of last resort to borrowers in need for liquidity. The reason is that potential borrowers have been reluctant to seek financing, fearing that a request for funds could be seen as a signal of financial weakness. This was the case in the U.S. with the discount window since the mid-1980s, the Y2K Special Lending Facility, and the post-2003 Primary Lending program, and internationally, with the IMF's Contingent Credit Line and a number of bank rescue packages in Japan, Mexico, and elsewhere. We present an asymmetric information model of emergency lending that explains why lender of last resort facilities may go unused in equilibrium and why such equilibria may persist for a long time. The key feature of the model is the dependence of the choice of equilibrium in each period on the information on borrowers' private characteristics inherited from the previous period. JEL classification: D82, E58, G21 Keywords: lender of last resort, discount window, private information * We thank Eddie Dekel for several useful conversations, and Svenja Gudell for excellent research assistance. The views expressed here are those of the authors and need not reflect those of the Federal Reserve System. † Federal Reserve Bank of New York;
Federal Reserve Bank of Kansas City
, 2004
"... The views expressed herein are those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System. Martin ..."
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The views expressed herein are those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System. Martin
Paula Hernandez-VermeESSAYS ON INTERMEDIATION, THE PAYMENTS SYSTEM AND MONETARY POLICY IMPLEMENTATION
"... This first essay reconsiders how a central bank might tailor its monetary policy in response to a liquidity shortage problem that arises from payments system design. Short run monetary intervention that completely mitigates liquidity shortage achieves Pareto optimality. However, it is not Pareto imp ..."
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This first essay reconsiders how a central bank might tailor its monetary policy in response to a liquidity shortage problem that arises from payments system design. Short run monetary intervention that completely mitigates liquidity shortage achieves Pareto optimality. However, it is not Pareto improving: by inducing shifts in agents’ portfolio choice, short run monetary policy alters the long term real interest rate, and consequently, the distribution of consumption goods among heterogeneous agents. A regime that pays interest on reserves could attain Pareto improving allocation, but is never Pareto optimal. Under the interest on reserves scheme, the central bank can pursue policy targeting the quantity of reserves balances for liquidity provision purpose independently of policy targeting the interest rate for other broad monetary policy objectives. v The second essay evaluates the performance of the quadratic linear programming (QLP) method in accounting for a bank’s liquidity management over the ten-day reserves maintenance period (RMP). The QLP method reasonably captures the qualitative features of the bank’s demand for excess reserves. The simulated demand
