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Payment System Externalities

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  • CHRISTINE A. PARLOUR
  • UDAY RAJAN
  • JOHAN WALDEN

Abstract

We examine how the payment processing role of banks affects their lending activity. In our model, banks operate in separate zones, and issue claims to entrepreneurs who purchase some inputs outside their own zone. Settling bank claims across zones incurs a cost. In equilibrium, a liquidity externality arises when zones are sufficiently different in their outsourcing propensities—a bank may restrict its own lending because it needs to hold liquidity against claims issued by another bank. Our work highlights that the disparate motives for interbank borrowing (investing in productive projects and managing liquidity) can have different effects on efficiency.

Suggested Citation

  • Christine A. Parlour & Uday Rajan & Johan Walden, 2022. "Payment System Externalities," Journal of Finance, American Finance Association, vol. 77(2), pages 1019-1053, April.
    • Handle: RePEc:bla:jfinan:v:77:y:2022:i:2:p:1019-1053
    DOI: 10.1111/jofi.13110
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    References listed on IDEAS

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    Cited by:

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    2. Gersbach, Hans & Zelzner, Sebastian, 2022. "Why Bank Money Creation?," CEPR Discussion Papers 17753, C.E.P.R. Discussion Papers.
    3. Dirk Niepelt, 2022. "Money and Banking with Reserves and CBDC," Diskussionsschriften dp2212, Universitaet Bern, Departement Volkswirtschaft.
    4. Althanns, Markus & Gersbach, Hans, 2023. "The Monetary Policy Haircut Rule," VfS Annual Conference 2023 (Regensburg): Growth and the "sociale Frage" 277597, Verein für Socialpolitik / German Economic Association.

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