Liquidity-saving mechanisms

Antoine Martin and James Joseph McAndrews ()

Journal of Monetary Economics, 2008, vol. 55, issue 3, pages 554-567

Abstract: This paper studies the incentives of participants in a real-time gross settlement system with and without the addition of a liquidity-saving mechanism (LSM). Participants in the 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 main contribution of the paper is to show that the design of an LSM has important implications for welfare. In particular, parameters determine whether the addition of an LSM increases or decreases welfare.

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Working Paper: Liquidity-saving mechanisms (2007)
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