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A Model of Tiered Settlement Networks

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  • JAMES CHAPMAN
  • JONATHAN CHIU
  • MIGUEL MOLICO

Abstract

This paper develops a model of settlement system to study the endogenous structure of settlement networks, and the welfare consequences of clearing agent failure. The equilibrium degree of tiering is endogenously determined by the cost structure and the information structure. The degree of tiering is decreasing in the fixed cost of operating the second-tier network and the availability of public credit history. Furthermore, the welfare effects of clearing agent failure can be decomposed into operational inefficiency and the loss of private information.

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File URL: http://hdl.handle.net/10.1111/jmcb.12004
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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 45 (2013)
Issue (Month): 2-3 (03)
Pages: 327-347

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Handle: RePEc:mcb:jmoncb:v:45:y:2013:i:2-3:p:327-347

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. James T. E. Chapman & Antoine Martin, 2007. "Rediscounting Under Aggregate Risk with Moral Hazard," Working Papers 07-51, Bank of Canada.
  2. Alexandra Lai & Nikil Chande & Sean O'Connor, 2006. "Credit in a Tiered Payments System," Working Papers 06-36, Bank of Canada.
  3. William Roberds & Charles M. Kahn, 2004. "Payments Settlement under Limited Enforcement: Private versus Public Systems," Econometric Society 2004 North American Winter Meetings 13, Econometric Society.
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Cited by:
  1. Hiroshi Fujiki, 2010. "Policy Measures to Alleviate Foreign Currency Liquidity Shortages under Aggregate Risk with Moral Hazard," IMES Discussion Paper Series 10-E-04, Institute for Monetary and Economic Studies, Bank of Japan.
  2. Robert Arculus & Jennifer Hancock & Greg Moran, 2012. "The Impact of Payment System Design on Tiering Incentives," RBA Research Discussion Papers rdp2012-06, Reserve Bank of Australia.
  3. Adams, Mark & Galbiati, Marco & Giansante, Simone, 2010. "Liquidity costs and tiering in large-value payment systems," Bank of England working papers 399, Bank of England.
  4. Jason Allen & Ali Horta├žsu & Jakub Kastl, 2011. "Analyzing Default Risk and Liquidity Demand during a Financial Crisis: The Case of Canada," Working Papers 11-17, Bank of Canada.

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