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A dynamic model of the payment system

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  • Thorsten Koeppl
  • Cyril Monnet
  • Ted Temzelides

Abstract

The authors study the design of efficient intertemporal payment arrangements when the ability of agents to perform certain welfare-improving transactions is subject to random and unobservable shocks. Efficiency is achieved via a payment system that assigns balances to participants, adjusts them based on the histories of transactions, and periodically resets them through settlement. Their analysis addresses two key issues in the design of actual payment systems. First, efficient use of information requires that agents participating in transactions that do not involve monitoring frictions subsidize those that are subject to such frictions. Second, the payment system should explore the trade-off between higher liquidity costs from settlement and the need to provide intertemporal incentives. In order to counter a higher exposure to default, an increase in settlement costs implies that the volume of transactions must decrease, but also that the frequency of settlement must increase. ; Also issued as Payment Cards Center Discussion Paper No. 07-14

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 07-22.

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Date of creation: 2007
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Handle: RePEc:fip:fedpwp:07-22

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Keywords: Payment systems;

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References

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  1. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
  2. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(4), pages 927-54, August.
  3. Kahn, Charles M & Roberds, William, 1998. "Payment System Settlement and Bank Incentives," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 11(4), pages 845-70.
  4. Koeppl, Thorsten Volker & Monnet, Cyril & Temzelides, Ted, 2006. "A dynamic model of settlement," Working Paper Series, European Central Bank 0604, European Central Bank.
  5. Guillaume Rocheteau & Randall Wright, 2004. "Money in search equilibrium, in competitive equilibrium, and in competitive search equilibrium," Working Paper 0405, Federal Reserve Bank of Cleveland.
  6. Morten L. Bech & Rodney J. Garratt, 2012. "Illiquidity in the Interbank Payment System Following Wide‐Scale Disruptions," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 44(5), pages 903-929, 08.
  7. Kahn, Charles M. & Roberds, William, 2001. "Real-time gross settlement and the costs of immediacy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(2), pages 299-319, April.
  8. Charles M. Kahn & William Roberds, 2002. "The economics of payment finality," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 1-12.
  9. Temzelides, Ted & Williamson, Stephen D., 2001. "Payments Systems Design in Deterministic and Private Information Environments," Journal of Economic Theory, Elsevier, Elsevier, vol. 99(1-2), pages 297-326, July.
  10. S. Rao Aiyagari & Stephen D. Williamson, 1998. "Money and Dynamic Credit Arrangements with Private Information," Game Theory and Information, EconWPA 9802002, EconWPA.
  11. Narayana R. Kocherlakota, 2003. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Levine's Bibliography 666156000000000426, UCLA Department of Economics.
  12. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 18(1), pages 1-23, January.
  13. Cyril Monnet & William Roberds, 2006. "Credit and the no-surcharge rule," Working Paper, Federal Reserve Bank of Atlanta 2006-25, Federal Reserve Bank of Atlanta.
  14. Hiroshi Fujiki & Edward J. Green & Akira Yamazaki, 1999. "Sharing the risk of settlement failure," Working Papers, Federal Reserve Bank of Minneapolis 594, Federal Reserve Bank of Minneapolis.
  15. Lacker, Jeffrey M. & Weinberg, John A., 2003. "Payment economics: studying the mechanics of exchange," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(2), pages 381-387, March.
  16. Narayana R. Kocherlakota, 1996. "Money is memory," Staff Report, Federal Reserve Bank of Minneapolis 218, Federal Reserve Bank of Minneapolis.
  17. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 54(4), pages 599-617, October.
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Cited by:
  1. Cyril Monnet & William Roberds, 2007. "Optimal pricing of payment services when cash is an alternative," Working Papers 07-26, Federal Reserve Bank of Philadelphia.
  2. Monnet, Cyril & Roberds, William, 2008. "Optimal pricing of payment services," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(8), pages 1428-1440, November.

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