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A duality theory of payment systems

We model the Central Bank's management of intraday liquidity in modern real-time gross settlement systems as a linear programming problem parameterized by different intraday monetary policies, such as reserve requirements, net debit caps and Lombard loans. We then use duality theory to determine the shadow-prices of constraints of each bank. These shadow-prices can be used by the Central Bank to set personalized intraday monetary policies in order to reduce idleness of money and to give a microfoundation of the too-big-to-fail policy.

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Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 45 (2009)
Issue (Month): 9-10 (September)
Pages: 679-692

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Handle: RePEc:eee:mateco:v:45:y:2009:i:9-10:p:679-692
Contact details of provider: Web page: http://www.elsevier.com/locate/jmateco

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  1. Bech, Morten L. & Soramäki, Kimmo, 2001. "Gridlock resolution in interbank payment systems," Research Discussion Papers 9/2001, Bank of Finland.
  2. James J. McAndrews & Samira Rajan, 2000. "The timing and funding of Fedwire funds transfers," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 17-32.
  3. Peñaloza, Rodrigo Andrés de Souza, 2005. "Preços-Sombra no Sistema de Pagamentos: Uma Abordagem Dual para a Política Monetária Intradiária," Revista Brasileira de Economia, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 59(4), October.
  4. repec:cdl:ucsbec:18-01 is not listed on IDEAS
  5. Guntzer, Michael M. & Jungnickel, Dieter & Leclerc, Matthias, 1998. "Efficient algorithms for the clearing of interbank payments," European Journal of Operational Research, Elsevier, vol. 106(1), pages 212-219, April.
  6. Bech, Morten L. & Garratt, Rod, 2003. "The intraday liquidity management game," Journal of Economic Theory, Elsevier, vol. 109(2), pages 198-219, April.
  7. Xavier Freixas & Bruno Parigi, 1998. "Contagion and efficiency in gross and net interbank payment systems," Proceedings 592, Federal Reserve Bank of Chicago.
  8. Gretsky, Neil E. & Ostroy, Joseph M. & Zame, William R., 1999. "Perfect Competition in the Continuous Assignment Model," Journal of Economic Theory, Elsevier, vol. 88(1), pages 60-118, September.
  9. Louis Makowski & Joseph M. Ostroy, 2000. "Linear Programming and General Equilibrium Theory," Econometric Society World Congress 2000 Contributed Papers 1673, Econometric Society.
  10. Gretsky, Neil E & Ostroy, Joseph M & Zame, William R, 1992. "The Nonatomic Assignment Model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 2(1), pages 103-127, January.
  11. Rodrigo Andrés de Souza Peñaloza, 2003. "On Shadow-Prices of Banks in Real-Time Gross Settlement Systems," Working Papers Series 71, Central Bank of Brazil, Research Department.
  12. Angelini, Paolo, 1998. "An analysis of competitive externalities in gross settlement systems," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 1-18, January.
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