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Central bank intervention in large value payment systems: An experimental approach

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  • Peter Heemeijer
  • Ronald Heijmans

Abstract

This experimental study investigates the behavior of banks in a large value payment system. More specifically, we look at 1) the reactions of banks to disruptions in the payment system and 2) the way banks behavior changes to incentives of the central bank. The game used in this experiment is a stylized version of a model of Bech and Garratt (2006) in which each bank can choose between paying in the morning (efficient) or in the afternoon (inefficient) and builds on the game by Abbink et al. (2010). The results show that a positive (bail out) or negative (punishment) incentive steers payments to the inefficient or efficient equilibrium, respectively. In contrast to our expectation, providing detailed information on disruptions steers payments towards the inefficient equilibrium.

Suggested Citation

  • Peter Heemeijer & Ronald Heijmans, 2015. "Central bank intervention in large value payment systems: An experimental approach," DNB Working Papers 466, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:466
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    File URL: https://www.dnb.nl/en/binaries/Working%20paper%20466_tcm47-319676.pdf
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    References listed on IDEAS

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    1. Klaus Abbink & Ronald Bosman & Ronald Heijmans & Frans van Winden, 2017. "Disruptions in Large-Value Payment Systems: An Experimental Approach," International Journal of Central Banking, International Journal of Central Banking, vol. 13(4), pages 63-95, December.
    2. Morten L. Bech & Antoine Martin & James J. McAndrews, 2012. "Settlement liquidity and monetary policy implementation—lessons from the financial crisis," Economic Policy Review, Federal Reserve Bank of New York, vol. 18(Mar), pages 3-20.
    3. Crawford, Vincent P, 1995. "Adaptive Dynamics in Coordination Games," Econometrica, Econometric Society, vol. 63(1), pages 103-143, January.
    4. Ronald Heijmans & Richard Heuver, 2011. "Is this bank ill? The diagnosis of doctor TARGET2," DNB Working Papers 316, Netherlands Central Bank, Research Department.
    5. Abbink, Klaus & Brandts, Jordi, 2008. "24. Pricing in Bertrand competition with increasing marginal costs," Games and Economic Behavior, Elsevier, vol. 63(1), pages 1-31, May.
    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, vol. 44(5), pages 903-929, August.
    7. Mehta, Judith & Starmer, Chris & Sugden, Robert, 1994. "The Nature of Salience: An Experimental Investigation of Pure Coordination Games," American Economic Review, American Economic Association, vol. 84(3), pages 658-673, June.
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    Citations

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    Cited by:

    1. Neville Arjani & Ronald Heijmans, 2020. "Is there anybody out there? Detecting operational outages from LVTS transaction data," DNB Working Papers 683, Netherlands Central Bank, Research Department.
    2. Ronald Heijmans & Chen Zhou, 2019. "Outlier detection in TARGET2 risk indicators," DNB Working Papers 624, Netherlands Central Bank, Research Department.
    3. Arifovic, Jasmina & Jiang, Janet Hua, 2019. "Strategic uncertainty and the power of extrinsic signals– evidence from an experimental study of bank runs," Journal of Economic Behavior & Organization, Elsevier, vol. 167(C), pages 1-17.

    More about this item

    Keywords

    payment systems; financial stability; experiment; decision making; central bank intervention;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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