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. http://www.imes.boj.or.jp/english/publication/mes/fmes97.html