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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- Kahn, Charles M. & Roberds, William, 2001.
"The CLS bank: a solution to the risks of international payments settlement?,"
Carnegie-Rochester Conference Series on Public Policy,
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- Jamie McAndrews & Antoine Martin, 2007.
"Liquidity saving mechanisms,"
2007 Meeting Papers
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- Bech, Morten L. & Garratt, Rod, 2001.
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qt0m6035wg, Department of Economics, UC Santa Barbara.
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- Matthew Willison, 2005. "Real-Time Gross Settlement and hybrid payment systems: a comparison," Bank of England working papers 252, Bank of England.
- Kurt Johnson & James J. McAndrews & Kimmo Soramaki, 2004. "Economizing on liquidity with deferred settlement mechanisms," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 51-72.
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