Three essays on policies towards risk

2006 2006

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Abstract (summary)

Payment systems facilitate all types of trade in monetary economies by providing a range of mechanisms including instruments and operating procedure through which transactions are settled. A break down or malfunction of the system can be seriously costly. In this regard, governments may implement policies to keep the payment system stable. As the former Federal Reserve Board Chairman Greenspan (2004) suggests, IT IS IMPORTANT TO UNDERSTAND THE MANY SOURCES OF RISK AND UNCERTAINTY THAT POLICYMAKERS FACE.

Chapter 1. "Intraday credit risks in a real time gross settlement system" identifies credit risks in the market and analyzes intraday credit policy in a large-value real time gross settlement payment system. A large-value interbank payment (LVIP) system such as Fedwire is the backbone of the payment systems, since it provides finality of settlements. Usually the LVIP system depends on the central bank for intraday credit (or daylight overdrafts). Credit risks in the market induce the central bank to implement several policies to manage risks on intraday credit. The apprehension of an economy about potential loss from credit risks is a determinant of the policy choice. Impediments to conducting monetary policy toward shocks from payment system credit risks can be a source of this apprehension. Quantitative limits (or caps) can be used when the economy fails to take into account potential loss from credit risks in the payment system. Price can be used when the economy puts greater weight on this potential loss. Since there are two types of credit risk in the market, it is enough to employ two tools. The model illustrates that a price and collateral policy achieves the highest social welfare among other sets of policies.

Chapter 2. "Payment instruments and the central bank" explores the sensitivity of payment system stability to macroeconomic shocks through the assets (from lenders' viewpoint) used as media of exchange. Specifically, this chapter studies a "payment instrument policy," such as the one implemented by the Bank of Korea, to promote usage of a certain type of payment instrument to stabilize the payment system. This chapter analyzes two payment instruments, promissory notes (non-intermediated credit) and bills of exchange (intermediated credit) using a simple partial equilibrium model of the credit market with moral hazard. The model shows that bills of exchange have a lower market risk than promissory notes under negative macroeconomic shocks. If, therefore, both promissory notes and bills of exchange are used in addition to fiat money, systems with a greater proportion of promissory notes in circulation will be riskier and more prone to collapse than systems with fewer promissory notes. The model also shows that a subsidy for bills of exchange is better than a tax on promissory notes.

Chapter 3. "Production uncertainty and private information in a search theoretic model" is a methodological exercise looking at production uncertainty and private information in a search theoretic model based on Williamson and Wright (1994). Different types of uncertainty generate different effects: the model shows that there exist more equilibria in the production uncertainty case than under the no production uncertainty case. Comparative statics show that an increase of production uncertainty raises possible returns from choosing the bad technology. These findings support agents' choice under a macroeconomic shock and generate important implications for designing policies to alleviate risk as in Chapter 2.

Indexing (details)

Economic theory;
Payment systems;
Public policy;
Daylight overdrafts;
Federal Reserve monetary policy;
Credit risk;
Central banks;
0511: Economic theory
Identifier / keyword
Social sciences; Payment system; Private information; Risk
Three essays on policies towards risk
Chang, Cheong-Seok
Number of pages
Publication year
Degree date
School code
DAI-A 67/10, Dissertation Abstracts International
Place of publication
Ann Arbor
Country of publication
United States
Pecchenino, Rowena
Michigan State University
University location
United States -- Michigan
Source type
Dissertations & Theses
Document type
Dissertation/thesis number
ProQuest document ID
Database copyright ProQuest LLC; ProQuest does not claim copyright in the individual underlying works.
Document URL
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