Quarterly Review 2512

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Thoughts on the Fed's Role in the Payments System

Edward J. Green - Senior Policy Advisor, Federal Reserve Bank of Chicago
Richard M. Todd - Vice President, Community Development

Winter 2001

Abstract
This essay concerns how the Federal Reserve’s role as a payment services provider can best be aligned with its broad mission to foster the integrity, efficiency, and accessibility of the U.S. payments system. A recommended strategy involves specialization in providing services where the central bank has a comparative advantage—notably, services directly related to providing a comprehensive, secure system of accounts for interbank settlement and potentially some additional services justified by economies of scope. If markets for other payment services evolve as expected, the recommended strategy would have the Fed generally rely on means other than direct service provision to help ensure that services are provided effectively and equitably. Several specific implications of this strategy are suggested. This essay also appeared in the “Federal Reserve Bank of Minneapolis 2000 Annual Report,” which was published in the April 2001 issue of the Bank’s magazine The Region.


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