Precautionary Demand and Liquidity in Payment Systems

Gara Afonso and Hyun Song Shin

Journal of Money, Credit and Banking, 2011, vol. 43, issue s2, 589-619

Abstract: In large‐value real‐time gross settlement payment systems, banks rely heavily on incoming funds to finance outgoing payments. Such reliance necessitates a high degree of coordination and synchronization. We construct a model of a payment system calibrated for the U.S. Fedwire system and examine the impact of realistic disruptions motivated by the recent financial crisis. In such settings, individually cautious behavior can have a significant and detrimental impact on the overall functioning of the payment system through a multiplier effect. Our results quantify the mutually reinforcing nature of greater caution, and allow comparative statics analysis of shifts in key parameters.

Date: 2011
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https://doi.org/10.1111/j.1538-4616.2011.00454.x

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Journal Article: Precautionary Demand and Liquidity in Payment Systems (2011)
Working Paper: Precautionary Demand and Liquidity in Payment Systems (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:43:y:2011:i:s2:p:589-619

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