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Production, Hidden Action, and the Payment System

In this paper, we study a model economy that can account for the distribution of payments within a day. In our model, debtors choose when to arrive at the settlement location. Concomitant with choosing their arrival, debtors are making a production decision. We assume there is a cost to arriving early; that is, late-arrival is associated with a technology that dominates early arrival/production. Second, we treat the debtor's choice as hidden from creditors. We derive conditions under which the planner allocates production to each type of agents. In the decentralized setting, there is a nonarbitrage condition that is consistent with a positive intraday rate. The central bank may be able to implement the planner's allocation with a proper intraday interest rate. In some cases, the optimal intraday rate is positive.

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File URL: http://economics.missouri.edu/working-papers/2010/WP1004_gu.pdf
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Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 1004.

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Length: 25 pgs.
Date of creation: 15 Mar 2010
Date of revision:
Publication status: Published in Journal of Monetary Economics 2011
Handle: RePEc:umc:wpaper:1004
Contact details of provider: Postal: 118 Professional Building, Columbia, MO 65211
Phone: (573) 882-0063
Fax: (573) 882-2697
Web page: http://economics.missouri.edu/

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  1. Antoine Martin & James McAndrews, 2008. "Should there be intraday money markets?," Staff Reports 337, Federal Reserve Bank of New York.
  2. Edward J. Green, 1999. "Money and debt in the structure of payments," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 13-29.
  3. Antoine Martin, 2008. "Reconciling Bagehot with the Fed's response to September 11," Staff Reports 217, Federal Reserve Bank of New York.
  4. Stephen Williamson & Randall Wright, 2010. "New monetarist economics: methods," Review, Federal Reserve Bank of St. Louis, issue May, pages 265-302.
  5. Bech, Morten L. & Garratt, Rod, 2001. "The Intraday Liquidity Management Game," University of California at Santa Barbara, Economics Working Paper Series qt0m6035wg, Department of Economics, UC Santa Barbara.
  6. Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2007. "Why Does Overnight Liquidity Cost More Than Intraday Liquidity?," Staff General Research Papers 13096, Iowa State University, Department of Economics.
  7. Antoine Martin, 2002. "Optimal pricing of intra-day liquidity," Research Working Paper RWP 02-02, Federal Reserve Bank of Kansas City.
  8. Lacker, Jeffrey M., 1997. "Clearing, settlement and monetary policy," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 347-381, October.
  9. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  10. James T. E. Chapman & Antoine Martin, 2007. "Rediscounting under aggregate risk with moral hazard," Staff Reports 296, Federal Reserve Bank of New York.
  11. David C. Mills, Jr, 2004. "Mechanism Design and the Role of Enforcement in Freeman's Model of Payments," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(1), pages 219-236, january.
  12. Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, vol. 86(5), pages 1126-38, December.
  13. Chao Gu & Joseph H. Haslag & Mark Guzman, 2010. "Production, Hidden Action, and the Payment System," Working Papers 1004, Department of Economics, University of Missouri.
  14. Olivier Armantier & Jeffrey Arnold & James McAndrews, 2008. "Changes in the timing distribution of Fedwire funds transfers," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 83-112.
  15. Scott Freeman, 2002. "Payments and Output," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 602-617, July.
  16. Freeman, Scott, 1999. "Rediscounting under aggregate risk," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 197-216, February.
  17. 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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