We study the incentives of participants in a real-time gross settlement system with and without the addition of a liquidity-saving mechanism (queue). Participants in our model face a liquidity shock and different costs for delaying payments. They trade off the cost of delaying a payment against the cost of borrowing liquidity from the central bank. The heterogeneity of participants in our model gives rise to a rich set of strategic interactions. The main contribution of our paper is to show that the design of a liquidity-saving mechanism has important implications for welfare, even in the absence of netting. In particular, we find that parameters will determine whether the addition of a liquidity-saving mechanism increases or decreases welfare.
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- Charles M. Kahn & William Roberds, 2000.
"The CLS Bank: a solution to the risks of international payments settlement?,"
2000-15, Federal Reserve Bank of Atlanta.
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qt0m6035wg, Department of Economics, UC Santa Barbara.
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