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Author:Monnet, Cyril 

Working Paper
Diamond-Dybvig and Beyond: On the Instability of Banking

Are financial intermediaries—in particular, banks—inherently unstable or fragile, and if so, why? We address this question theoretically by analyzing whether model economies with financial intermediation are more prone than those without it to multiple, cyclic, or stochastic equilibria. We consider several formalizations: insurance-based banking, models with reputational considerations, those with fixed costs and delegated investment, and those where bank liabilities serve as payment instruments. Importantly for the issue at hand, in each case banking arrangements arise endogenously. ...
FRB Atlanta Working Paper , Paper 2023-02

Journal Article
Money and interest rates

This study describes and reconciles two common, seemingly contradictory views about a key monetary policy relationship: that between money and interest rates. Data since 1960 for about 40 countries support the Fisher equation view, that these variables are positively related. But studies taking expectations into account support the liquidity effect view, that they are negatively related. A simple model incorporates both views and demonstrates that which view applies at any time depends on when the change in money occurs and how long the public expects it to last. A surprise money change that ...
Quarterly Review , Volume 25 , Issue Fall , Pages 2-13

Monetary policy implementation frameworks: a comparative analysis

We compare two stylized frameworks for the implementation of monetary policy. The first framework relies only on standing facilities, and the second one relies only on open market operations. We show that the Friedman rule cannot be implemented in the first framework, but can be implemented using the second framework. However, for a given rate of inflation, we show that the first framework unambiguously achieves higher welfare than the second one. We conclude that an optimal system of monetary policy implementation should contain elements of both frameworks. Our results also suggest that any ...
Staff Reports , Paper 313

Journal Article

How would you feel if even though you were making regular monthly payments, your mortgage bank sold your house? This may seem like an odd question, but this type of situation happens every day in financial markets in a practice known as rehypothecation. Although such practices may be hard for nontraders to understand, rehypothecation is widespread in financial markets. Following the crisis of 2007-2009, the Dodd-Frank Act put restrictions on rehypothecation for derivatives. To understand the scope of these restrictions, we need to understand the role of rehypothecation in financial trades. In ...
Business Review , Issue Q4 , Pages 18-25

Working Paper
The poor, the rich and the enforcer: institutional choice and growth

We study economies where improving the quality of institutions ? modeled as improving contract enforcement ? requires resources, but enables trade that raises output by reducing the dispersion of marginal products of capital. We find that in this type of environment it is optimal to combine institutional building with endowment redistribution, and that more ex-ante dispersion in marginal products increases the incentives to invest in enforcement. In addition, we show that institutional investments lead over time to a progressive reduction in inequality. Finally, the framework we describe ...
Working Papers , Paper 0801

Working Paper
Private liquidity and banking regulation

The authors show that the regulation of bank lending practices is necessary for the optimal provision of private liquidity. In an environment in which bankers cannot commit to repay their creditors, the authors show that neither an unregulated banking system nor narrow banking can provide the socially efficient amount of liquidity. If the bankers provided such an amount, then they would prefer to default on their liabilities. The authors show that a regulation that increases the value of the banking sector?s assets (e.g., by limiting competition in bank lending) will mitigate the commitment ...
Working Papers , Paper 12-11

Journal Article
Let's make it clear: how central counterparties save(d) the day

The bankruptcy of Lehman Brothers in 2008 will certainly be featured in history books as one of the greatest financial failures so far, but it will also be recorded as yet another episode of the historically successful performance of clearing arrangements in ensuring the resiliency of markets. Recognizing the usefulness of safe and sound clearing and settlement procedures, the Federal Reserve has recently supported the attempt to shift the clearing of some contracts to a central counterparty. In this article, Cyril Monnet outlines the arguments in favor of central counterparty clearing, the ...
Business Review , Issue Q1 , Pages 1-10

Working Paper
Monetary policy in a channel system

Channel systems for conducting monetary policy are becoming increasingly popular. Despite its popularity, the consequences of implementing policy with a channel system are not well understood. The authors develop a general equilibrium framework of a channel system and study the optimal policy. A novel aspect of the channel system is that a central bank can "tighten" or "loosen" its policy without changing its policy rate. This policy instrument has so far been overlooked by a large body of the literature on the optimal design of interest-rate rules.
Working Papers , Paper 08-7

Working Paper
The emergence and future of central counterparties

The authors explain why central counterparties (CCPs) emerged historically. With standardized contracts, it is optimal to insure counterparty risk by clearing those contracts through a CCP that uses novation and mutualization. As netting is not essential for these services, it does not explain why CCPs exist. In over-the-counter markets, as contracts are customized and not fungible, a CCP cannot fully guarantee contract performance. Still, a CCP can help: As bargaining leads to an inefficient allocation of default risk relative to the gains from customization, a transfer scheme is needed. A ...
Working Papers , Paper 10-30

Working Paper
Optimal pricing of payment services when cash is an alternative

Payments are increasingly being made with payment cards rather than currency-this despite the fact that the operational cost of clearing a card payment usually exceeds the cost of transferring cash. In this paper, the authors examine this puzzle through the lens of monetary theory. They consider the design of an optimal card-based payment system when cash is available as an alternative means of payment, and derive conditions under which cards will be preferred to cash. The authors find that a feature akin to the controversial "no-surcharge rule" may be necessary to ensure the viability of ...
Working Papers , Paper 07-26


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