Alternative Central Bank Credit Policies for Liquidity Provision in a Model of Payments

33 Pages Posted: 27 Dec 2003

See all articles by David C. Mills

David C. Mills

Board of Governors of the Federal Reserve System

Date Written: March 2005

Abstract

I explore alternative credit policies in a theoretical model where (i) money is necessary as a means of payment, (ii) there is a shortage of liquidity that a central bank addresses through the extension of credit, (iii) money is necessary to repay debts, and (iv) the incentives to default are explicit and contingent on the credit policy designed. Using a mechanism design approach, I compare a credit policy of charging an interest rate on credit with that of requiring the posting of collateral. I find that the pricing policy can implement good allocations while the collateral policy cannot whenever collateral bears an opportunity cost.

Keywords: Payment systems, central banking, liquidity, collateral

JEL Classification: E40, E58, C73

Suggested Citation

Mills, David C., Alternative Central Bank Credit Policies for Liquidity Provision in a Model of Payments (March 2005). FEDs Working Paper No. 2005-55, Available at SSRN: https://ssrn.com/abstract=480723 or http://dx.doi.org/10.2139/ssrn.480723

David C. Mills (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-530-6265 (Phone)
202-872-7533 (Fax)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
141
Abstract Views
1,694
Rank
370,936
PlumX Metrics