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Money and Debt in the Structure of Payments

Quarterly Review 2322 | Spring 1999

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Edward J. Green Senior Policy Advisor, Federal Reserve Bank of Chicago
Money and Debt in the Structure of Payments


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.