Alternative central bank credit policies for liquidity provision in a model of payments

I explore alternative central bank policies for liquidity provision in a model of payments. I use a mechanism design approach so that agents’ incentives to default are explicit and contingent on the credit policy designed. In the first policy, the central bank invests in costly enforcement and charg...

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Bibliographic Details
Published inJournal of monetary economics Vol. 53; no. 7; pp. 1593 - 1611
Main Author Mills, David C.
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.10.2006
Elsevier
Elsevier Sequoia S.A
SeriesJournal of Monetary Economics
Subjects
Bank liquidity
Central banking
Central banks
Collateral
Credit
Credit policy
Liquidity
Monetary economics
Payment systems
Payments
Payments systems
Studies
E40
Liquidity
E58
Central banking
Collateral
C73
Payments systems
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Summary:I explore alternative central bank policies for liquidity provision in a model of payments. I use a mechanism design approach so that agents’ incentives to default are explicit and contingent on the credit policy designed. In the first policy, the central bank invests in costly enforcement and charges an interest rate to recover costs. I show that the second-best solution is not distortionary. In the second policy, the central bank requires collateral. If collateral does not bear an opportunity cost, then the solution is first best. Otherwise, the second best is distortionary because collateral serves as a binding credit constraint.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2005.05.008