Payments-Related Intraday Credit Differentials and the Emergence of a Vehicle Currency

Sujit Chakravorti ()

International Finance from EconWPA

Abstract: The hypothesis put forth is that the U.S. dollar's role as a vehicle currency in global foreign exchange markets is linked to the low cost of payments-related intraday credit. After reviewing the types of intraday credit facilities extended to participants on payment systems settling the major currencies, a foreign exchange market is simulated. Results indicate that if there are sufficient differences in the availability of intraday credit between one settlement system and the others, the currency cleared and settled by the payment system extending the greatest intraday credit will have narrower bid-ask spreads. Vehicle currencies are associated with narrower spreads. The hypothesis put forth is that the U.S. dollar's role as a vehicle currency in global foreign exchange markets is linked to the low cost of payments-related intraday credit. After reviewing the types of intraday credit facilities extended to participants on payment systems settling the major currencies, a foreign exchange market is simulated. Results indicate that if there are sufficient differences in the availability of intraday credit between one settlement system and the others, the currency cleared and settled by the payment system extending the greatest intraday credit will have narrower bid-ask spreads. Vehicle currencies are associated with narrower spreads. U.S. dollar's role as a vehicle currency in global foreign exchange markets is linked to the low cost of payments-related intraday credit. After reviewing the types of intraday credit facilities extended to participants on payment systems settling the major currencies, a foreign exchange market is simulated. Results indicate that if there are sufficient differences in the availability of intraday credit between one settlement system and the others, the currency cleared and settled by the payment system extending the greatest intraday credit will have narrower bid-ask spreads. Vehicle currencies are associated with narrower spreads.

Keywords: payment systems; foreign exchange; liquidity (search for similar items in EconPapers)
JEL-codes: F3 F4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk and nep-ifn
Date: 2001-11-05
Note: Type of Document - Latex/pdf; prepared on IBM PC ; to print on HP/PostScript/Franciscan monk; pages: 345,395,4323247 ; figures: included/. This is located on the web at:
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Related works:
Working Paper: Payments-related intraday credit differentials and the emergence of a vehicle currency (1997)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpif:0111001

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