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Ann Finance (2013) 9:83114
DOI 10.1007/s10436-011-0186-6
SYMPOSIUM
Received: 28 November 2009 / Accepted: 25 October 2011 / Published online: 10 November 2011 Springer-Verlag 2011
Abstract Recent developments in private payments arrangements, particularly at the wholesale level, (including recent innovations in China) challenge central banks longstanding monopoly on the provision of the ultimate means of settlement for nancial transactions. This paper examines competition between public payments arrangements and private intermediaries, and the effect on central banks role in monetary policy. Central to the issue is the role of collateral both as a requirement for participation in central bank sponsored payments arrangements and as the backing for private intermediary arrangements. The presence of private systems serves as a check on the ability of a monetary authority to tighten monetary policy.
Keywords Payment systems Collateral Monetary policy Inside money
JEL Classication E52 E58 G21 G28
The previous version of this paper was entitled Offshore Settlement, Collateral and Interest Rates. Under this title it was presented at the Oxford University Financial Research Summer Symposium, June 2008, the Bank of Canada workshop Payments Economics: Theory and Policy, November 2008, the China International Conference in Finance, July 2009, the New York Federal Reserve Bank Money and Payments Workshop: Payment Systems in a Changing Financial Environment, October 2009, and in seminar presentations at the University of Illinois, the Bank of England and the Federal Reserve Bank of Chicago. I am grateful to the editor, the reviewer and in particular to discussants Florian Heider, Cyril Monnet, and Ben Lester and also to Tomohiro Ota, Bruce Summers, and Robert Steigerwald for valuable comments.
C. M. Kahn (B)
Department of Finance, University of Illinois at UrbanaChampaign, 1206 S. Sixth St., Champaign, IL 61820, USAe-mail: [email protected]
Private payment systems, collateral, and interest rates
Charles M. Kahn
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84 C. M. Kahn
Over recent decades, payments arrangements have undergone unprecedented changes. Nonetheless, standard macroeconomics continues to treat payments as primarily based on public systems. Roughly speaking the basic model is one in which commercial banks rely on the central banks reserves in order to make payments. In turn, the central bank engages in monetary policy by affecting the aggregate amount of reserves, trading non-reserve assets for reserve assets, and thereby in a more-or-less mechanical way increasing...