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Production, Hidden Action, and the Payment System

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Abstract

In this paper, we study a model economy that can account for the distribution of payments within a day. In our model, debtors choose when to arrive at the settlement location. Concomitant with choosing their arrival, debtors are making a production decision. We assume there is a cost to arriving early; that is, late-arrival is associated with a technology that dominates early arrival/production. Second, we treat the debtor's choice as hidden from creditors. We derive conditions under which the planner allocates production to each type of agents. In the decentralized setting, there is a nonarbitrage condition that is consistent with a positive intraday rate. The central bank may be able to implement the planner's allocation with a proper intraday interest rate. In some cases, the optimal intraday rate is positive.

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File URL: http://economics.missouri.edu/working-papers/2010/wp1004_gu.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 1004.

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Length: 25 pgs.
Date of creation: 15 Mar 2010
Date of revision:
Handle: RePEc:umc:wpaper:1004

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Keywords: Friedman rule; discount window policy; payment system; intraday rate; settlement risk .;

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References

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  1. Olivier Armantier & Jeffrey Arnold & James McAndrews, 2008. "Changes in the timing distribution of Fedwire funds transfers," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 83-112.
  2. Angelini, Paolo, 1998. "An analysis of competitive externalities in gross settlement systems," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 1-18, January.
  3. Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, vol. 86(5), pages 1126-38, December.
  4. Gu, Chao & Guzman, Mark & Haslag, Joseph, 2011. "Production, hidden action, and the payment system," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 172-182, March.
  5. David C. Mills, Jr, 2004. "Mechanism Design and the Role of Enforcement in Freeman's Model of Payments," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(1), pages 219-236, january.
  6. Scott Freeman, 2002. "Payments and Output," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 602-617, July.
  7. James T. E. Chapman & Antoine Martin, 2007. "Rediscounting under aggregate risk with moral hazard," Staff Reports 296, Federal Reserve Bank of New York.
  8. Lacker, Jeffrey M., 1997. "Clearing, settlement and monetary policy," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 347-381, October.
  9. Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2007. "Why Does Overnight Liquidity Cost More Than Intraday Liquidity?," Staff General Research Papers 13096, Iowa State University, Department of Economics.
  10. Bech, Morten L. & Garratt, Rod, 2001. "The Intraday Liquidity Management Game," University of California at Santa Barbara, Economics Working Paper Series qt0m6035wg, Department of Economics, UC Santa Barbara.
  11. Stephen D. Williamson & Randall Wright, 2010. "New Monetarist Economics: methods," Staff Report 442, Federal Reserve Bank of Minneapolis.
  12. ANTOINE MARTIN & JAMES McANDREWS, 2010. "Should There Be Intraday Money Markets?," Contemporary Economic Policy, Western Economic Association International, vol. 28(1), pages 110-122, 01.
  13. Freeman, Scott, 1999. "Rediscounting under aggregate risk," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 197-216, February.
  14. Martin, Antoine, 2004. "Optimal pricing of intraday liquidity," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 401-424, March.
  15. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  16. Green, Edward-J, 1997. "Money and Debt in the Structure of Payments," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 15(1), pages 63-87, May.
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Cited by:
  1. Gu, Chao & Guzman, Mark & Haslag, Joseph, 2011. "Production, hidden action, and the payment system," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 172-182, March.
  2. Marius Jurgilas & Filip Zikes, 2013. "Implicit intraday interest rate in the UK unsecured overnight money market," Working Paper 2013/09, Norges Bank.

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