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Scale economies, cost efficiencies, and technological change in Federal Reserve payments

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Author Info
Paul W. Bauer
Gary D. Ferrier
Abstract

This paper uses a stochastic cost frontier to examine the scale economies, cost efficiencies, and technological change of three payments instruments--check, automated clearinghouse (ACH) transfers, and Fedwire processing--provided by the Federal Reserve over the period 1990-94. We find evidence of substantial scale economies and cost inefficiencies in the ACH and Fedwire services. Check processing also exhibits substantial cost inefficiency, but constant returns to scale. Technological progress is found to be sizeable for ACH and Fedwire; check processing is found to have experienced technological "regress," probably because of a decrease in processing volume over the sample period.

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Paper provided by Federal Reserve Bank of Cleveland in its series Financial Services working paper with number 96-01.

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Date of creation: 1996
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Handle: RePEc:fip:fedcfs:96-01

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Keywords: Payment systems ; Checks ; Clearinghouses (Banking) ; Fedwire;

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  1. Stigler, George J, 1976. "The Xistence of X-Efficiency," American Economic Review, American Economic Association, vol. 66(1), pages 213-16, March.
  2. Gallant, A. Ronald, 1981. "On the bias in flexible functional forms and an essentially unbiased form : The fourier flexible form," Journal of Econometrics, Elsevier, vol. 15(2), pages 211-245, February. [Downloadable!] (restricted)
  3. Ferrier, Gary D. & Grosskopf, Shawna & Hayes, Kathy J. & Yaisawarng, Suthathip, 1993. "Economies of diversification in the banking industry : A frontier approach," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 229-249, April. [Downloadable!] (restricted)
  4. Rangan, Nanda & Grabowski, Richard & Aly, Hassan Y. & Pasurka, Carl, 1988. "The technical efficiency of US banks," Economics Letters, Elsevier, vol. 28(2), pages 169-175. [Downloadable!] (restricted)
  5. Mester, Loretta J., 1993. "Efficiency in the savings and loan industry," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 267-286, April. [Downloadable!] (restricted)
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  6. Aly, Hassan Y, et al, 1990. "Technical, Scale, and Allocative Efficiencies in U.S. Banking: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 211-18, May. [Downloadable!] (restricted)
  7. Fried, Harold O. & Knox Lovell, C. A. & Eeckaut, Philippe Vanden, 1993. "Evaluating the performance of US credit unions," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 251-265, April. [Downloadable!] (restricted)
  8. Putterman Louis, 1993. "Ownership and the Nature of the Firm," Journal of Comparative Economics, Elsevier, vol. 17(2), pages 243-263, June. [Downloadable!] (restricted)
  9. Schmidt, Peter & Sickles, Robin C, 1984. "Production Frontiers and Panel Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 2(4), pages 367-74, October.
  10. Paul W. Bauer, 1993. "Efficiency and technical progress in check processing," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 24-38. [Downloadable!]
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