Risk externalities in a payments oligopoly |
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Authors: | Tore Nilssen |
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Institution: | (1) Department of Economics, University of Oslo, P.O. Box 1095, Blindern, 0317 Oslo, Norway |
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Abstract: | I discuss the role to be played by central banks in payment systems by way of an oligopoly model of a payments market where
firms exert negative risk externalities upon each other. A central bank participating actively in this market is modelled
as benign in two ways: exerting less externalities than other banks and maximizing welfare rather than profit. Because other
banks react strategically to the central bank’s presence due to its low externalities, there is a risk that it backfires,
with these other banks’ taking more risky positions than if the central bank were not there. The proper role of the central
bank may actually be to stay out. |
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Keywords: | |
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