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...

Central counterparties (CCPs) have increasingly become a cornerstone of financial markets infrastructure. We present a model where trades are time-critical, liquidity is limited and there is limited enforcement of trades. We show a CCP novating trades implements efficient trading behaviour. It...

Clearinghouses support financial trades by keeping records of transactions and by providing liquidity through short-term credit that is periodically cleared by participants. We study efficient clearing arrangements for formal exchanges, where traders must clear with a clearinghouse, and for...

Central counterparties (CCPs) have increasingly become a cornerstone of financial markets infrastructure. We present a model where trades are time-critical, liquidity is limited and there is limited enforcement of trades. We show a CCP novating trades implements efficient trading behaviour. It...

We study the role of a central counterparty (CCP) in controlling counterparty risk. When trading is organized via a centralized exchange with fungible contracts -- as in a futures market -- we show that it is optimal to clear trades via a CCP that uses (i) novation to pool the risk of default...