Liquidity saving mechanisms

James McAndrews and Antoine Martin

No 165, 2007 Meeting Papers from Society for Economic Dynamics

Abstract: We study the incentives of participants in a real-time gross settlement with and without the addition of a liquidity saving mechanism. Participants in our model face a liquidity shock and different cost of delaying payments. They trade-off the cost of delaying a payment with 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. In particular, we find that adding one type of liquidity saving mechanism can either increase or decrease welfare depending on parameters.

Date: 2007
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Citations: View citations in EconPapers (5)

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Journal Article: Liquidity-saving mechanisms (2008)
Working Paper: Liquidity-saving mechanisms (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed007:165

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