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A dynamic model of settlement

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  • Koeppl, Thorsten Volker
  • Monnet, Cyril
  • Temzelides, Ted

Abstract

We investigate the role of settlement in a dynamic model of a payment system where the ability of participants to perform certain welfare-improving transactions is subject to random and unobservable shocks. In the absence of settlement, the full information first-best allocation cannot be supported due to incentive constraints. In contrast, this allocation is supportable if settlement is introduced. This, however, requires that settlement takes place with a sufficiently high frequency. JEL Classification: E4, E5

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0604.

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Date of creation: Apr 2006
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Handle: RePEc:ecb:ecbwps:20060604

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Keywords: Intertemporal Incentives; payments; settlement;

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