Monetary and Economic Studies Vol.15, No.1 / May 1997

Money and Debt in the Structure of Payments

Edward J. Green

Freeman (1996a,b) formulates a model in which arrangements based on intermediated debt that is settled using money achieve higher welfare than direct money payment achieves. A monetary authority can sometimes further improve welfare and achieve efficiency by participating in a secondary market for debt; and a private intermediary can also achieve efficiency by means reminiscent of clearinghouses. These results are derived here in a simplified version of Freeman (IU (Js model. This analysis clarifies that ordinary private agents in the model are capable of assuming the role of central bank or clearinghouse. An artificial agent, posited solely to play such a role and endowed with special capabilities for it, is unnecessary. 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.

Keywords: Payments; Settlement; Clearinghouse; Central bank; Novation and substitution

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 1997 Bank of Japan All Rights Reserved.

Home Japanese Home