currency and credit in a private information economy in an environment with private information spatial separation and limited communication a currency like object and more standard named credits can be distinguished the credit objects can be used among agents in an enduring relationship that is among agents with known trading histories whereas the currency like object must be used among relative strangers in this environment collectively determined pareto optimal rules make the level of the currency like object and the mix of currency to named credits responsive to individual needs and to economywide states total indebtedness is determined by the number of lenders that is by preference or demand shocks and the mix of currency to credits is determined by transaction patterns among the agents

the inflation tax in a real business cycle model money is incorporated into a real business cycle model using a cash in advance constraint the model economy is used to analyze whether the business cycle is different in high inflation and low inflation economies and to analyze the impact of variability in the growth rate of money in addition the welfare cost of the inflation tax is measured and the steady state properties of high and low inflation economies are compared

the impact of technological change on the currency behavior of households an empirical cross section study the purpose of this article is to determine the impact of adoption of new technology atms by households on their behavior in holding currency inventories previous studies hypothesize that households respond to the availibility of atms by reducing their currency inventories to test this hypothesis data from two large household surveys are utilized it is shown that the use of technology has a substantial impact on the currency inventories held by households copyright 1994 by ohio state university press

controlling risk in payment systems over the past twenty years the growing integration of financial markets the development of new financial instruments and the advance of computer technology have all contributed to a remarkable growth of financial activity in the main industrialized countries one of the most significant consequences of this growth has been the unprecedented increase in the volume of trade on the largevalue interbank payment systems see table 1 which itself has resulted in a massive increase in intraday overdrafts on those systems see table 2 the central banks of the large industrialized countries concerned with the risks that this growth was creating for their banking systems have been studying the risks on interbank payment systems work that has borne fruit with the angell report bank for international settlements bis 1989 and the lamfalussy report bis 1990 both under the aegis of the bis and the padoa schioppa report european community 1992 under the aegis of the eec of particular concern is the organization of interbank large value transfer systems banks have traditionally concluded among themselves multilateral netting arrangements which settle at discrete time intervals this is the modern form of clearinghouses which still operate for small value transfers these arrangements

clearinghouse banks and banknote over issue abstract the paper presents a model of banks as clearinghouses of private debt where money is used as the means of payment implications of the model include i the private provision of banknotes or a discount window may be needed to avoid the insufficient debt clearing that results from an inflexible currency stock and ii an uncontrolled total money stock may result in a multiplicity of equilibria including an inflationary banknote over issue

money and loans agents expect to trade with each other infinitely often but face a temporal absence of a coincidence of wants when they meet only loans and or money can facilitate exchange in small close knit economies enduring trade relationships are valued and loans are optimal in larger economies with limited communication information concerning repayment of loans diffuses too slowly to deter agents from reneging unless loans are severely restricted in magnitude money has no such redeemability problems but if clower constraints bind loans help supplement money purchases so that both become essential roles of various institutions and the historical evolution of media of exchange are explained

the susan b anthony dollar and the theory of coin note substitutions this paper analyzes governments attempts to replace circulating notes with coins it argues that because of network externalities in currency systems a government cannot simply offer a new coin such as the susan b anthony dollar to the public and expect it to circulate even when the coin note substitution would benefit the economy for such a substitution to succeed a government may need to force the adoption of the coin by withdrawing the competing bill from circulation copyright 1994 by ohio state university press

automated teller machines and the share of demand deposits in the money supply this paper explores he theoretical and empirical effect of automated teller machines atms technology on the share of demand deposits in the money supply our hypothesis is that the introduction of atms increases deposits at the expense of currency holdings this hypothesis is theoretically established within a framework of a simple model describing the individual s cost functions of holding demand deposits and currency and is empirically confirmed on the basis of the israeli experience

clearing and settlement during the crash this article is a reexamination of the clearing and settlement process in financial markets particularly the futures market and its performance during the 1987 stock market crash it provides both some institutional background and some conceptual perspective on the problems faced by the system during the week of october 19 much of the discussion is based on the useful analogies that can be drawn between the clearing house and other financial intermediaries such as banks and insurance companies a major conclusion is that the federal reserve played a vital rob in protecting the integrity of the clearing and settlements system during the crash

money and credit as means of payment abstract a stochastic economic environment is presented in which the mix of cash and resource costly credit used as means of payment is endogenous for reasonable values of the credit cost parameter velocity can be quite variable and sensitive to the nominal interest rate those parameter values also generate larger welfare costs of inflation than have been found previously and a sizable impact of inflation on real interest rates

the efficiency of self regulated payments systems learning from the suffolk system this paper analyzes the operation of the suffolk system an interbank note clearing network operating throughout new england from the 1820s through the 1850s banks made markets in each other s notes at par which allowed new england to avoid discounting of bank notes in trade privately enforced regu lations prevented free riding in the form of excessive risk taking observers of the suffolk system have been divided some emphasized the stability and effi these arrangements others argued that the arrangements were motivated by rent seeking on the part of boston banks and were primarily coervice and exploitative in the neighboring mid atlantic states regulations limited the potential for developing a regional clearing system centered in new york city on the model of the suffolk system this difference makes it possible to compare the performance of banks across regulatory regimes to judge the relative merits of the sanguine and jaundiced views of the suffolk system evidence supports the sanguine view new england s banks were able to issue more notes and these notes traded at uniform and low discount rates compared to those of other banks an examination of the balance sheets and stock returns of boston and new york city banks indicates that the stock market perceived that bank lending produced less risk for bank debt holders in boston than in new york the benefits of the system extended outside of boston peripheral new england banks displayed high propensities to issue notes and wer able to maintain low specie reserves boston banks did not show high profit rates or high ratios of market to book values of equity thus there is no evidence that boston banks extracted rents from their control of the payments system this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

alternative monies and the demand for media of exchange prepaid cards cash cards electronic purse smart cards these are but a few of the elements in the revolution now taking place in monetary systems around the world at that movement s heart is the emergence of a new value transfer system where alternative monies are offered to consumers through the miracle of electronics in some cases the new monies are merely a repackaging of existing media of exchange for example stored value cards that have been traditionally available for single vendors now are being offered for multiple merchant use in other cases technology and its acceptability are being cross sold as with debit cards and the expanded use of atm cards as point of sale vehicles however the banking industry is perhaps most enthusiastic about the emerging technology of smart cards chip in cards that have been making inroads in europe with the expanded capability of a memory chip alternative monies are seen to have the capability of moving to a new plateau of acceptance there are many stories in the business press about the general enthusiasm for these new forms of money for example block 1995 and cutler 1994 herald the new day of electronic money they forecast the demise of both the greenback and of commercial banks that exploit the float derived from its use according to the hyperbole from marketing reps from this side of the financial community currency and demand deposits soon will be endangered species consumer acceptance is alleged to be high and cost efficiency associated with the new technology is expected to be substantial

the case of the missing currency in late 1992 currency in the hands of the public was close to 300 billion representing nearly 30 percent of m1 one would think that an economic variable of this magnitude would be well analyzed and well understood quite the contrary the last serious surveys of currency holdings commissioned by the federal reserve were in 1984 and 1986 these surveys indicate that currency demand is not at all understood probably the most intriguing and newsworthy result of these surveys was that about 80 percent of currency holdings simply could not be explained despite the stir of general interest that followed those studies economists have shown little lasting interest in considering the implications of these findings this paper is written in hopes of stimulating more interest in currency behavior

a framework for analyzing efficiency risks costs and innovations in the payments system the market for payment instruments such as cash checks and electronic funds transfers is one of the largest most important and economically interesting markets in the economic system virtually every economic transaction requires the use of a payment instrument therefore on a value basis the demand for payment instruments equals the demand for all other goods services assets and other financial instruments traded in the economy combined in a monetary economy the buyers and sellers of any commodity must not only agree on the price and quantity to be exchanged but must also concur on the payment method that will be employed in the exchange that is every commodity buyer takes on the role of a payor and every commodity seller takes on the role of a payee and they jointly demand a payment instrument of equal value to the commodities exchanged the size of payments markets is illustrated in table 1 which shows transactions

the real bills doctrine versus the quantity theory a reconsideration two competing monetary policy prescriptions are analyzed within the context of overlapping generations models the real bills prescription is for unfettered private intermediation or central bank operations designed to produce the effects of such intermediation the quantity theory prescription in contrast is for restrictions on private intermediation designed to separate money from credit although our models are consistent with quantity theory predictions about money supply and price level behavior under these two policy prescriptions the models imply that the quantity theory prescription is not pareto optimal and the real bills prescription is

monetary growth in a turnpike environment abstract a general equilibrium model of monetary growth in a turnpike economy is constructed it is shown that money lifts the economy up to a pareto superior growth path by eliminating the investment in projects with low returns the growth rate of the monetary economy is larger than that of the nonmonetary economy and mckinnon s complementarity hypothesis holds provided that the agents degree of relative risk aversion is not too large the main theorem states a sufficient condition for the existence of a monetary equilibrium with a constant rate of return on money

the interest rate neutrality of fiscal deficits testing for ricardian equivalence and capital inflow abstract this paper examines the extent to which the ricardian equivalence theorem as restated by barro 1974 and the capital inflow hypothesis of dwyer 1985 provide valid explanations of the observed interest rate neutrality of fiscal policy in open economies a theoretical open economy macromodel is specified and subsequently tested on a multi country dataset which spans the recent period of floating exchange rates on balance the empirical results favour the capital inflow hypothesis which emphasizes the importance of international financial integration in facilitating the financing of public deficits by the savings of agents who reside across political frontiers

intraday management of bank reserves the effects of caps and fees on daylight overdrafts the federal reserve system imposes caps and charges fees on the negative intraday balances in banks reserve accounts i e on daylight overdrafts our empirical results suggest that caps alone did little to reduce daylight overdrafts in the aggregate by contrast the 1994 imposition of fees reduced the average daily maximum overdraft on the fedwire system by about 93 billion and the average aggregate overdraft at any time during the day by about 43 billion we also found statistical evidence that higher beginning of day reserve balances lower aggregate dollar values of securities related transfers over fedwire and lower shares of banks assets funded with federal funds and repurchase agreements reduced daylight overdrafts copyright 1996 by ohio state university press

bank behavior interest rate determination and monetary policy in a financial system with an intraday federal funds market abstract this paper has two purposes one is to construct a formal model of the determination of and relationships between interest rates on funds with 24 hour overnight and intraday terms the second is to use this model to examine the likely effects of alternative federal reserve proposals for addressing the issue of intraday extension of federal reserve credit in the form of daylight overdrafts of bank reserve accounts it is demonstrated that present proposals all entail potentially significant drawbacks for monetary policy

payment transactions instruments and systems a survey the payments literature ranges from theoretical general equilibrium models to practical payment issues related to the day to day operation of various national networks for the transfer of money it is an area where economic theory and institutional structure are often closely intertwined and it is currently undergoing significant change shifting from costly paper based systems to technologically advanced electronic payments the extant literature is surveyed here with the aim of integrating the various strands of payment research which have been largely pursued separately in addition we present newly available data to illustrate and investigate a number of underdeveloped areas in this literature 1998 elsevier science b v all rights reserved

systemic risk in the netting system abstract in interbank clearing networks a bank experiencing sudden liquidity or solvency problems may prevent settlement of the claims of its direct creditors which may in turn jeopardize settlement of other institutions the paper presents an empirical assessment of the potential size of this domino effect in the italian netting system a participant s settlement failure is simulated and the impact on the rest of the system measured on average only about 4 percent of participants were large enough to trigger systemic crises less than 1 percent defaulted due to systemic reasons the average monetary loss was less than 3 percent of the daily flow of funds through the clearing system similar simulations by other authors for the u s system yielded a much larger impact of systemic risk we argue that the difference is mainly due to the much smaller volume of funds flowing through the italian system and to structural differences

comment on alternative monies and the demand for media of exchange professors santomero and seater have put considerable energy into building and analyzing a carefully crafted mathematical model with a narrow microbanking focus they explore the representative consumer s willingness to substitute electronic money which they portray as plastic based smart cards with no nontransactional informational processing or communications usages for paper based traditional money their model concerns itself only with what we could call pocket money and pocket electronic platforms the question i wish to explore in my remarks is where can we go from here how can this first cut model be made to cast more light on the problem of persuading households to dive deeply into electronic banking

the payments system liquidity and rediscounting in an economy where fiat money serves both as a medium of exchange and the means by which debts are cleared it is shown that nonoptimal equilibria of constrained liquidity may arise optimality may be restored by temporary expansions of the monetary base e g an active central bank discount window copyright 1996 by american economic association

the way we pay with money we assess the sample distribution of payments in the netherlands using survey data for 1984 1986 the payment pattern fits a lognormal distribution with peaks caused by the price tags of the purchased items the results are used to simulate the use of coins and notes which indicates a rather efficient denominational mix but a high degree of hoarding for the large bank notes

interbank lending and systemic risk systemic risk refers to the propagation of a bank s economic distress to other economic agents linked to that bank through financial transactions banking authorities often prevent systemic risk through an implicit insurance of interbank claims or by reducing interbank transactions and centralizing banks liquidity management this paper investigates whether the flexability afforded by decentralized bank interactions can be preserved while protecting the central banks from the necessity of conducting undesired rescue operations it develops a model in which decentralized interbank leading is motivated by peer monitoring in this context the paper derives the optimal prudential rules and in particular looks at the impact of interbank monitoring on the solvency and liquidity ratios of borrowing and lending banks last it provides conditions which a too big to fail policy is or is not justified and studies the possibility of propagation of a bank s liquidity shock throughout the financial system copyright 1996 by ohio state university press

redistributive cooperation market failure wealth transfers and the basle accord indecember1987 policymakersbelongingtothegroupoften g 10 signeda far reaching agreement on international nancial regulation the basle accord ontheinternational convergence of capital measuresand capital standards underthetermsof thisagreement g 10 policymakersimplemented uniform risk based capitalrequirements on commercial banks the origins of the basle accord according tokapstein lay in the consequencesof international nancial integration international nancial integration by raising systemic risk and eroding regulators capacity toensure the soundness of national banking systems generated a market failure evi denced by thedebt crisis commercial bankshad accepted ariskier portfolioofloansthan society considered optimal and were now unwilling to bear the full costs of thislending behavior financial market failurecreated a demand for international regula tiontowhichpolicymakersrespondedby supplying thebasleaccord to theextentthat the payments system had the characterof apublic good it wasreasonable to askevery state to contribute to its maintenance bank supervisors responded to theneed for greater oversight by negotiating the basleaccord

consumer theory and the demand for money the following sections are included introductionthe definition of moneythe microeconomic theory of a monetary economythe aggregation theoretic approach to money demandindex number theorythe links between aggregation theory index number theory and monetary theoryunderstanding the new divisia aggregatesthe optimal level of monetary subaggregationeconometric considerationsapproximating the monetary services subutility functionan exampleempirical dimensionsempirical comparisons of index numbersempirical results for the demand system approachextensionsconclusions this abstract was borrowed from another version of this item

financial crises payment system problems and discount window lending in a developed economy financial crises are rapidly conveyed to the payment system which tends to rely on private credit extensions in most countries while many authors recommend that the central bank do no more than provide adequate aggregate liquidity during a crisis this policy requires well functioning private credit markets to channel liquidity to solvent but illiquid firms this paper presents a model of private lending which defines a crisis as a time when lenders become uncertain about how to assess financial risks and therefore rationally withdraw from making new loans in such an environment a government lender of last resort can improve social welfare copyright 1996 by ohio state university press