The welfare effects of a liquidity-saving mechanism
AbstractThis paper considers the welfare effect of introducing a liquidity-saving mechanism (LSM) in a real-time gross settlement (RTGS) payment system. We study the planner's problem to get a better understanding of the economic role of an LSM and find that an LSM can achieve the planner's allocation for some parameter values. The planner's allocation cannot happen without an LSM, as long as some payments can be delayed without cost. We show that, in equilibrium with an LSM, there can be either too few or too many payments settled early compared with the planner's allocation, depending on the parameter values. Using Fedwire data to calibrate our model, we describe the equilibrium that would arise with an LSM and compare welfare with and without an LSM. Our results suggest that introducing an LSM could have significant benefits.
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Bibliographic InfoPaper provided by Federal Reserve Bank of New York in its series Staff Reports with number 331.
Date of creation: 2008
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-06-27 (All new papers)
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