The Payments System, Liquidity, and Rediscounting

Scott Freeman

American Economic Review, 1996, vol. 86, issue 5, 1126-38

Abstract: In an economy where fiat money serves both as a medium of exchange and the means by which debts are cleared, it is shown that nonoptimal equilibria of constrained liquidity may arise. Optimality may be restored by temporary expansions of the monetary base (e.g., an active central-bank 'discount window'). Copyright 1996 by American Economic Association.

Date: 1996
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