Liquidity-Saving Mechanisms

50 Pages Posted: 1 May 2007

See all articles by Antoine Martin

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics

James McAndrews

Wharton Financial Institutions Center

Date Written: April 2007

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: liquidity-saving mechanism, real-time gross settlement, large-value payment system

JEL Classification: E42, E58, G21

Suggested Citation

Martin, Antoine and McAndrews, James, Liquidity-Saving Mechanisms (April 2007). FRB of New York Staff Report No. 282, Available at SSRN: https://ssrn.com/abstract=983782 or http://dx.doi.org/10.2139/ssrn.983782

Antoine Martin (Contact Author)

Federal Reserve Bank of New York - Research and Statistics ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6943 (Phone)

James McAndrews

Wharton Financial Institutions Center ( email )

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States
9176090086 (Phone)
19104 (Fax)

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