Liquidity-Saving Mechanisms
50 Pages Posted: 1 May 2007
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: Suggested Citation
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