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Author:Martin, Antoine 

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A study of competing designs for a liquidity-saving mechanism

We study two designs for a liquidity-saving mechanism (LSM), a queuing arrangement used with an interbank settlement system. We consider an environment where banks are subjected to liquidity shocks. Banks must make the decision to send, queue, or delay their payments after observing a noisy signal of the shock. With a balance-reactive LSM, banks can set a balance threshold below which payments are not released from the queue. Banks can choose their threshold such that the release of a payment from the queue is conditional on the liquidity shock. With a receipt-reactive LSM, a payment is ...
Staff Reports , Paper 336

Discussion Paper
Standard Elements of a Monetary Policy Implementation Framework

In the minutes of the July 2015 Federal Open Market Committee (FOMC) meeting, the chair indicated that Federal Reserve staff would undertake an extended effort to evaluate potential long-run monetary policy implementation frameworks. But what is a central bank’s monetary policy implementation framework? In a series of four posts, we provide an overview of the key elements that typically constitute such a framework.
Liberty Street Economics , Paper 20160201

Journal Article
An economic analysis of liquidity-saving mechanisms

A recent innovation in large-value payments systems has been the design and implementation of liquidity-saving mechanisms (LSMs), tools used in conjunction with real-time gross settlement (RTGS) systems. LSMs give system participants, such as banks, an option not offered by RTGS alone: they can queue their outgoing payments. Queued payments are released if some prespecified event occurs. LSMs can reduce the amount of central bank balances necessary to operate a payments system as well as quicken settlement. This article analyzes the performance of RTGS systems with and without the addition of ...
Economic Policy Review , Volume 14 , Issue Sep , Pages 25-39

Discussion Paper
The Tri-Party Repo Market Like You Have Never Seen It Before

The tri-party repo market is a large and important market where securities dealers find a substantial amount of short-term funding. Despite its importance, this market was very opaque before the crisis. Since March 2010, in accordance with recommendation 13 of the Task Force on Tri-Party Repo Infrastructure Reform report, the Federal Reserve Bank of New York has made monthly data on the tri-party repo market available to the public. Today, with our new interactive tool, there is a whole new way to view the market and its evolution. You can make your own charts, looking at volumes for specific ...
Liberty Street Economics , Paper 20151019b

Working Paper
Liquidity provision vs. deposit insurance : preventing bank panics without moral hazard?

In this paper I ask whether a central bank policy of providing liquidity to banks during panics can prevent bank runs without causing moral hazard. This kind of policy has been widely advocated, most notably by Bagehot (1873). To analyze such a policy, I build a model with three key features: 1) bank panics can occur in equilibrium, 2) there can be moral hazard, 3) the central bank can create money which is willingly held. I show that a particular central bank repurchase policy provides liquidity to the banking system and can prevent bank panics without moral hazard problems. I also show that ...
Research Working Paper , Paper RWP 01-05

Report
Optimality of the Friedman rule in an overlapping generations model with spatial separation

We examine models with spatial separation and limited communication that have shown some promise toward resolving the disparity between theory and practice concerning optimal monetary policy; these models suggest that the Friedman rule may not be optimal. We show that intergenerational transfers play a key role in this result, the Friedman rule is a necessary condition for an efficient allocation in equilibrium, and the Friedman rule is chosen whenever agents can implement mutually beneficial arrangements. We conclude that in order for these models to resolve the aforementioned disparity, ...
Staff Reports , Paper 225

Report
Reconciling Bagehot with the Fed's response to September 11

The nineteenth-century economist Walter Bagehot maintained that in order to prevent bank panics, a central bank should provide liquidity at a very high rate of interest. However, most of the theoretical literature on liquidity provision suggests that central banks should lend at an interest rate of zero. This latter recommendation is broadly consistent with the Federal Reserve?s behavior in the days following September 11, 2001. This paper shows that Bagehot?s recommendation can be reconciled with the Fed?s policy if one recognizes that Bagehot had in mind a commodity money regime in which ...
Staff Reports , Paper 217

Report
A primer on the GCF Repo® Service

This primer provides a detailed description of the GCF Repo Service, a financial service provided by the Fixed Income Clearing Corporation. The primer is composed of an introductory note and two separate papers. {{p}} The first paper focuses on the clearance and settlement of GCF Repo. These financial plumbing details are especially important because the settlement of GCF Repo has been and will continue to be impacted by the current reforms to the tri-party repo settlement platform. In particular, the authors lay out the various ways that intraday credit was used pre-reform to facilitate the ...
Staff Reports , Paper 671

Discussion Paper
How Do the Fed's MBS Purchases Affect Credit Allocation?

It is sometimes said that the Federal Reserve should not engage in “credit allocation.” But what does credit allocation actually mean? And how do current Fed policies affect the allocation of credit? In this post, we describe two separate ideas often associated with credit allocation. The first idea is that the Fed should not take credit risk, which taxpayers would ultimately have to bear. The second idea is that the Fed’s actions should not influence the flow of credit to particular sectors. We consider whether the Fed’s holdings of agency mortgage-backed securities (MBS) could ...
Liberty Street Economics , Paper 20180806

Discussion Paper
How Do Central Bank Balance Sheets Change in Times of Crisis?

The 2007-09 financial crisis, and the monetary policy response to it, have greatly increased the size of central bank balance sheets around the world. These changes were not always well understood and some were controversial. We discuss these crisis-induced changes, following yesterday’s post on the composition of central bank balance sheets in normal times, and explain the policy intentions behind some of them.
Liberty Street Economics , Paper 20160204

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