Liquidity-saving mechanisms

Antoine Martin () and James Joseph McAndrews ()

No 282, Staff Reports from Federal Reserve Bank of New York

Abstract: 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.

Keywords: Bank liquidity; Payment systems; Banks and banking; Banks and banking, Central; Monetary theory (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
Date: 2007
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Journal Article: Liquidity-saving mechanisms (2008)
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