Scale Economies, Cost Efficiencies and Technological Change in Federal Reserve Payments Processing

Abstract

This paper uses a stochastic cost frontier to examine the scale economies, cost efficiencies, and technological change of three payment instruments (check, ACH, and Fedwire processing) provided by the Federal Reserve over the period 1990-1994. We find evidence of substantial scale economies and cost inefficiencies in the ACH and Fedwire services. Check processing also exhibits substantial cost inefficiency, but is found to have experienced technological "regress," a finding that is likely due to a decrease in processing volume over the sample period.

JEL Classification: G28