Federal Reserve Bank of New York - Research and Statistics
Federal Reserve Bank of New York
FRB of New York Staff Report No. 282
We study the incentives of participants in a real-time gross settlement system with and without the addition of a liquidity-saving mechanism (queue). Participants in our model face a liquidity shock and different costs for delaying payments. They trade off the cost of delaying a payment against the cost of borrowing liquidity from the central bank. The heterogeneity of participants in our model gives rise to a rich set of strategic interactions. The main contribution of our paper is to show that the design of a liquidity-saving mechanism has important implications for welfare, even in the absence of netting. In particular, we find that parameters will determine whether the addition of a liquidity-saving mechanism increases or decreases welfare.
Number of Pages in PDF File: 50
Keywords: liquidity-saving mechanism, real-time gross settlement, large-value payment system
JEL Classification: E42, E58, G21working papers series
Date posted: May 1, 2007
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