Background
Eligible paper refers to specific financial securities that are considered acceptable for rediscounting by a central bank. This type of paper is crucial for maintaining liquidity in financial markets as it can be quickly converted into cash by banks through rediscounting.
Historical Context
The concept of eligible paper has evolved alongside the development of central banking systems globally. Initially, central banks established criteria to ensure liquidity and reduce risk within the banking system by accepting high-quality, short-term securities.
Definitions and Concepts
Eligible paper includes:
- Treasury bills
- Short-dated gilts
- Securities accepted by a British bank or discount house (in the UK)
- Securities that meet the Federal Reserve requirements (in the US)
Eligible paper must meet standards ensuring stability and minimal risk, making them suitable for inclusion in bank portfolios.
Major Analytical Frameworks
Classical Economics
Classical economists emphasize the importance of liquidity and stability provided by eligible paper in maintaining economic equilibrium.
Neoclassical Economics
Neoclassical views stress market efficiency. Eligible paper must be high-quality to ensure minimal interference with market operations during rediscounting processes.
Keynesian Economics
Keynesians focus on the role of central banks in managing demand and liquidity. Eligible paper helps regulate the money supply effectively, supporting counter-cyclical economic policies.
Marxian Economics
Marxian analysis may critique the capitalist nature of financial markets, but acknowledges the role of liquidity granted by eligible paper in sustaining capital flows.
Institutional Economics
Institutional economists highlight the regulatory role of central banks in defining eligible paper, shaping financial stability and institutional behavior.
Behavioral Economics
From a behavioral standpoint, eligible paper provides a safety net that influences risk behaviours within financial institutions.
Post-Keynesian Economics
Post-Keynesians consider discretionary measures necessary for a robust financial system; thus, they view eligible paper as vital for applying monetary policy dynamically.
Austrian Economics
Austrian economists prioritize the soundness and spontaneous order of market operations, often preferring minimal intervention even in defining eligible paper.
Development Economics
In the context of development, ensuring accessible rediscounting through eligible paper can help stabilise emerging economies and foster economic growth.
Monetarism
Monetarists focus on controlling money supply. Through eligible paper, central banks can precisely manage the liquidity within the financial system.
Comparative Analysis
Different central banking systems use similar core principles but may vary in the specifics of what constitutes eligible paper. For example, while both the Bank of England and the Federal Reserve rediscount securities, the exact criteria for eligibility differ in nature and specifics tailored to their economic contexts.
Case Studies
UK
The Bank of England traditionally accepts Treasury bills, short-dated gilts, and other high-grade instruments.
US
The Federal Reserve’s criteria for eligible paper include various forms of commercial paper that meet stringent standards.
Suggested Books for Further Studies
- “The New Lombard Street” by Perry Mehrling
- “Understanding Central Banking” by David M. Jones
- “Monetary Theory and Policy” by Carl E. Walsh
Related Terms with Definitions
- Rediscounting: The process by which central banks provide liquidity to financial institutions by purchasing or lending against their securities.
- Treasury Bills: Short-term government securities with maturities ranging from a few days to a year.
- Gilts: Long-term UK government securities.
- Commercial Paper: Unsecured, short-term debt instruments used by corporations.
The well-defined and regulated use of eligible paper plays a critical role in the stability and liquidity of modern financial systems.
