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Previous comparative analyses of gross and net settlement have focused on the credit risk of the central counterparty in net settlement arrangements and on the incentives for participants to alter the risk of their portfolios under net settlement. By modeling the trading economy that generates the demand for payment services, we are able to show some largely unexplored advantages of net settlement. We find that net settlement can prevent certain grid-lock situations, which may arise in gross settlement in the absence of delivery versus payment requirements. In addition, we show that net settlement can economize on collateral requirements and avoid trading delays. [ABSTRACT FROM AUTHOR]

We examine whether transactable forms of privately issued, demandable debt are better used as "banknotes" or "checks." The distinction between the two is that a check must be redeemed by the issuing bank with each use whereas a banknote can circulate. We find that the answer to the question depends on the cost of early redemption. If this cost is small, banknotes will not circulate so the question is moot. If this cost is large, incentive problems may prevent the circulation of banknotes. For intermediate values of the early redemption cost, banknotes will be preferred over checks. [ABSTRACT FROM AUTHOR]

This article describes and measures how the Bank of Amsterdam supplied a successful fiat money in a world of specie by offering the unlimited repo of large coins at a near-zero rate. Our data from 1736 to 1791 finds that such liberal access led to volatile loan levels and that the Bank responded with sterilization by means of open market operations. In this way, the Bank held its money stock at a roughly constant level and helped stabilize its value. Profit was another part of the Bank's policy framework, and the pursuit of seigniorage eventually compromised stabilization. [ABSTRACT FROM AUTHOR]

The article reports on the daily view of spreads and short term interest rate movements. Interest rate forecasting is hard, particularly for the short end of the term structure. Monetary policy can impact the information content for the short end of the term structure and there can be predictive power in spreads between weekly maturity rates for those future rates. The spreads during October 1979 to October 1982, when the U.S. Federal Reserve Board was not smoothing interest rates, were examined and found to contain predictive power.

The article discusses a statistical study concerning the use of aggregates as monetary targets for forecasting real output, real and nominal gross national product, and prices in the United States. The intertemporary stability of economic models is analyzed with a likelihood function that evaluates three monetary aggregates--a post-1949 monetary base from the Federal Reserve Bank of St. Louis and the post-1958 M1 and M2 series bases from the Federal Reserve Board. Data from the four-variate, six-lag vector autoregressive (VAR) models summarize sample information. Deregulation, monetary aggregates' stationarity properties, macro time series, federal reserve monetary targets, accuracy of VAR models, and variance decompositions at a horizon of 16 quarters are mentioned.

In August 1763, northern Europe experienced a financial crisis with numerous parallels to the 2008 Lehman episode. The crisis affected merchant banks that were funded by short-term credit instead of deposits. We use archival data to show that these 'shadow' banks suffered a sudden loss of funding after the failure of a major bank. The central bank at the hub of the crisis, the Bank of Amsterdam, responded by broadening the range of collateral it accepted. The data also show how this emergency liquidity helped to contain the crisis, by preventing the collapse of at least two other major banks. [ABSTRACT FROM AUTHOR]

What are the benefits provided by a payment system? What are the trade-offs in public versus private payment systems and in restricted versus open payments arrangements? Modern payment systems encompass a variety of institutional designs with varying degrees of counterparty protection. We develop a framework that allows for an examination and comparison of payment systems, and specification of conditions leading to their adoption. We relate these conditions to the design of present large-value payment systems (Fedwire, CHIPS, TARGET, etc.). [ABSTRACT FROM AUTHOR]

The article discusses the risk management in the emerging payment system. Accordingly, the electronic form of retail payment that is rapidly evolving has the dominant risks of committing fraud, illicit use and data security breaches. It cites that only time and monitoring of problem can tell if the risk is controllable. Moreover, containment is the prevalent risk mitigation technique used by payment system providers to control risk.

The article focuses on the origins of the central banks whose currencies form the basis of the modern monetary and payment system. The first steps towards the system took place in the 17th century in the Dutch Republic, when the government created an "exchange bank," the Bank of Amsterdam. The Bank's role was to regulate the price of coins and insure their quality against the practice of debasing them with lesser metals. From its founding in 1609, the Bank of Amsterdam took deposits and became a sanctuary for coins of greater value within the Dutch economy. By adapting to changes in the values of the coins in circulation, the Bank kept itself the most desirable place to settle accounts and cope with changes in the nation's currency laws. By 1659, the Bank's position was strong enough that it could ban withdrawals without the presentation of a receipt. The receipts were in effect the first central bank currency.

An extensive literature in monetary theory has emphasized the role of money as a record-keeping device. Money assumes this role in situations where using credit would be too costly, and some might argue that this role will diminish as the cost of information and thus the cost of credit-based transactions continues to fall. In this article we investigate another use for money, the provision of privacy. That is, a money purchase does not identify the purchaser, whereas a credit purchase does. In a simple trading economy with moral hazard, we compare the efficiency of money and credit, and find that money may be useful even when information is free. [ABSTRACT FROM AUTHOR]

The analysis presented below represents an attempt to interpret Sims's view of policymaking by broadening the spectrum of game theoretic models of policy available to macroeconomists. This is done by considering a class of models which are between the discretionary and precommitment models. This class of models is neither purely positive nor normative, but is instead presented as a first attempt at understanding the effects of political uncertainty in a rational expectations setting. Although political uncertainty, as defined in this class of models, doesn't exactly correspond to Sims's [1982] definition, there are some interesting similarities between reduced forms implied by the models below and those advocated by Sims. The basic idea of the models is to model policy formation not as a game between the public and a single policymaker, but rather as a game played between the public and a sequence of policymaking administrations. The administrations come into power at random intervals. Upon coming into power, each administration announces a policy plan that will hold as long as that administration stays in power. With the (random) arrival of a new administration, replanning occurs, hence the term stochastic replanning. For purposes of tractability, the analysis below simply assumes each administration to be completely credible. Although this concession to tractability might be seen as overly generous, the approach taken here could be viewed as roughly complementary to that taken in the reputational models of Barro and Gordon and others, which abstract from the possibility of administration turnover,s A complete theory of policy would probably involve neither of these abstractions. The rest of the paper is organized as follows. Section 2 illustrates the idea of stochastic replanning in a two-period model. Section 3 derives a stochastic replanning equilibrium in a simple rational expectations environment. Section 4 extends the analysis to the case where the... [ABSTRACT FROM AUTHOR]

Doan, Litterman, and Sims (DLS) have suggested using conditional forecasts to do policy analysis with Bayesian vector autoregression (BVAR) models. Their method seems to violate the Lucas critique, which implies that coefficients of a BVAR model will change when there is a change in policy rules. In this article, we attempt to determine whether the Lucas critique is important quantitatively in a BVAR macro model that we construct. We find evidence following two candidate policy rule changes of significant coefficient instability and of a deterioration in the performance of the DLS method. [ABSTRACT FROM AUTHOR]

The article presents the author's comments on the paper "Budget Constraints and Time-Series Evidence on Consumption," by Jordi Gali published in the December 1991 issue. The paper by Jordi Gali sought to test the implications of the consumer's intertemporal budget constraint for aggregate U.S. time series on consumption. Gali derived a number of results using a representative consumer model, and presented the results of econometric tests designed to exploit these results. The author contends that Gali's analysis suffers from an oversight that can lead to some ambiguity in the interpretation of the test results.

Presents a response to a comment on the article on the Lucas critique method for economic policy analysis. Invariance of the underlying deep parameters of reduce-form equations; Usefulness of the equations; Basis of the authors' evaluations.