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The economics of payments

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  • Ed Nosal
  • Guillaume Rocheteau

Abstract

In this paper we provide a survey of the payment literature in a unified framework. The environment is a variant of the Lagos and Wright (2005) model of monetary exchange, where some trades occur in bilateral meetings while others occur in more or less decentralized markets. We use this basic environment to introduce alternative sets of trading frictions that give rise to different payments instruments and/or payments institutions. We investigate credit economies, monetary economies, and economies in which money and credit coexist. We also study alternative assets, such as foreign exchange, capital (equity), and government liabilities, which can be used as payment instruments in conjunction with money. We introduce banks as deposit-taking institutions whose liabilities circulate in the economy. We also provide an extension in which the process of the settlement of debt for money is modeled and the potential social costs of settlement are characterized. Finally, we investigate government policy responses to the social costs introduced by various trading frictions.

Suggested Citation

  • Ed Nosal & Guillaume Rocheteau, 2006. "The economics of payments," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Feb.
  • Handle: RePEc:fip:fedcpd:y:2006:i:feb:n:14
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    References listed on IDEAS

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    Cited by:

    1. Stephen D. Williamson, 2009. "Transactions, Credit, and Central Banking in a Model of Segmented Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(2), pages 344-362, April.
    2. Antoine Martin & Michael Orlando & David Skeie, 2008. "Payment networks in a search model of money," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 104-132, January.
    3. Jonathan Chiu & Alexandra Lai, 2007. "Modelling Payments Systems: A Review of the Literature," Staff Working Papers 07-28, Bank of Canada.
    4. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.
    5. Sinelnikova-Muryleva, Elena, 2018. "Analysis of the Consequences of the Development of Payment Systems for Monetary Policy in the Context of Deepening Financial Markets," Working Papers 031813, Russian Presidential Academy of National Economy and Public Administration.

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    Keywords

    Payment systems ; Money;

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