The Welfare Effects of a Liquidity-Saving Mechanism
This paper considers the welfare effect of introducing a liquidity-saving mechanism (LSM) in a real-time gross settlement (RTGS) payment system. We study the planner's problem to get a better understanding of the economic role of an LSM and find that an LSM can achieve the planner's allocation for some parameter values. The planner's allocation cannot happen without an LSM, as long as some payments can be delayed without cost. We show that, in equilibrium with an LSM, there can be either too few or too many payments settled early compared with the planner's allocation, depending on the parameter values. Using Fedwire data to calibrate our model, we describe the equilibrium that would arise with an LSM and compare welfare with and without an LSM. Our results suggest that introducing an LSM could have significant benefits.
Quantifying the Benefits of a Liquidity-Saving Mechanism
This paper attempts to quantify the benefits associated with operating a liquidity-saving mechanism (LSM) in Fedwire, the large-value payment system of the Federal Reserve. Calibrating the model of Martin and McAndrews (2008), we find that potential gains are large compared to the likely cost of implementing an LSM, on the order of hundreds of thousands of dollars per day.
Payment system reform in formerly centrally planned economics
Abstract The payment system is a linchpin of a functioning market economy, but existing payment systems in many formerly centrally planned economies are in a primitive state, reflecting the legacy of the monobank system. The wholesale payment system can play a fundamental role in facilitating the efficient exchange of goods, services, and assets, and is particularly important in fostering the development of a money market — which in turn is a precondition for market-based implementation of monetary policy. In reforming the payment system, some important policy issues, especially the allocation of settlement risk, need to be addressed.