The B.E. Journal of Macroeconomics
Editor-in-Chief: Abraham, Arpad / Cavalcanti, Tiago
Ed. by Carceles-Poveda , Eva / Debortoli, Davide / Kambourov, Gueorgui / Lambertini, Luisa / Pavoni, Nicola / Ruhl, Kim
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Most Downloaded Articles
- Comparing Wealth Effects: The Stock Market versus the Housing Market by Case, Karl E./ Quigley, John M. and Shiller, Robert J.
- Monetary and Macroprudential Policy Rules in a Model with House Price Booms by Kannan, Prakash/ Rabanal, Pau and Scott, Alasdair M.
- The Effects of the Great Recession on Central Bank Doctrine and Practice by Bernanke, Ben S.
- Who Gets the Credit? And Does It Matter? Household vs. Firm Lending Across Countries by Beck, Thorsten/ Büyükkarabacak, Berrak/ Rioja, Felix K. and Valev, Neven T.
1University of Western Ontario, (email)
Citation Information: The B.E. Journal of Macroeconomics. Volume 9, Issue 1, ISSN (Online) 1935-1690, DOI: 10.2202/1935-1690.1695, May 2009
- Published Online:
We construct a general equilibrium model in which credit is used as a medium of exchange, and banks participate in a settlement system to finalize their customers' transactions. We study the optimal settlement system design, and find that a trade-off arises endogenously within the model. A higher frequency of settlement and more costly intra-day borrowing policies limit the banks' accumulation of liabilities and promote conservative reserve management, hence limiting the risk of default should a bank fail for any reason. However, such policies also imply higher banking costs, less interest paid on deposits, and less capital allocated by banks to productive investments. After characterizing equilibrium and welfare, we parameterize the economy and analyze how the optimal settlement system policies depend on several features of the economy, including the risk of bank failure, the fragility of the settlement system, the volume of trade by banks' customers, and the rate of return on investments available to banks.