Payment Systems, Multiple Types of Collateral, Banking, and Collateral Policy

A monetary model is constructed to explore the real effects of multiple collateral requirements for credit settlements on the choice of cash and credit, banking activity, and consumption. Money serves not only as the means of payments but as the means of settlements. A collateral policy may be welfare-improving in a steady-state equilibrium when the nominal interest rate is positive. Reducing cash-collateral requirements increases the amount of cash as the means of payments and consumption with cash but adds up the cost of foregone interest. The optimal collateral policy is to balance out the marginal benefit and cost of holding cash.