In Scott Freeman’s (1996) model, payment system arrangements based on intermediated debt that is settled with money achieve higher welfare than does direct money payment. In a simplified version of Freeman’s model, welfare can be further improved and efficiency achieved by a monetary authority participating in a secondary market for debt or by a private intermediary using a common clearinghouse device. The analysis clarifies that ordinary private agents can assume the role of central bank or clearinghouse; no artificial agent, posited solely to play that role and endowed with special capabilities for it, is necessary. The institutional features required for a central bank or a clearinghouse to achieve efficiency, particularly features related to central bank independence, are discussed informally.
This article is reprinted from Monetary and Economic Studies (May 1997, vol. 15, no. 1, pp. 63–87) with the permission of the Institute for Monetary and Economic Studies of the Bank of Japan.
Reprinted From: Monetary and Economic Studies
(Vol. 15, No. 1, May 1997, pp. 63-87)
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