IDEAS home Printed from https://ideas.repec.org/p/bca/bocawp/07-28.html
   My bibliography  Save this paper

Modelling Payments Systems: A Review of the Literature

Author

Listed:
  • Jonathan Chiu
  • Alexandra Lai

Abstract

Payments systems play a fundamental role in an economy by providing the mechanisms through which payments arising from transactions can be settled. The existing literature on the economics of payments systems is large but loosely organized, in that each model uses a distinct set-up and sometimes a distinct equilibrium concept. As a result, it is not easy to generalize how model features are related to model implications. The authors conduct a non-technical survey of the literature and discuss some of these connections. They organize the literature according to three general classes of modelling approaches, and compare those approaches in terms of their strengths and weaknesses. They also describe the policy implications across the three model classes and relate them to the model environment/assumptions. The authors summarize what can be learned from the literature with respect to policy issues and identify areas for future research.

Suggested Citation

  • Jonathan Chiu & Alexandra Lai, 2007. "Modelling Payments Systems: A Review of the Literature," Staff Working Papers 07-28, Bank of Canada.
  • Handle: RePEc:bca:bocawp:07-28
    as

    Download full text from publisher

    File URL: https://www.bankofcanada.ca/wp-content/uploads/2010/03/wp07-28.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Carol Ann Northcott, 2002. "Estimating Settlement Risk and the Potential for Contagion in Canada's Automated Clearing Settlement System," Staff Working Papers 02-41, Bank of Canada.
    2. Stephen D. Williamson, 2009. "Transactions, Credit, and Central Banking in a Model of Segmented Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(2), pages 344-362, April.
    3. Holthausen, Cornelia & Rochet, Jean-Charles, 2006. "Efficient Pricing of Large Value Interbank Payment Systems," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1797-1818, October.
    4. Townsend, Robert M, 1989. "Currency and Credit in a Private Information Economy," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1323-1344, December.
    5. Jean-Charles Rochet & Jean Tirole, 1996. "Controlling risk in payment systems," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 832-869.
    6. Holthausen, Cornelia & Rønde, Thomas, 2000. "Regulating access to international large-value payment systems," Working Paper Series 22, European Central Bank.
    7. McAndrews James J. & Roberds William, 1995. "Banks, Payments, and Coordination," Journal of Financial Intermediation, Elsevier, vol. 4(4), pages 305-327, October.
    8. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    9. Kahn, Charles M & McAndrews, James & Roberds, William, 2003. "Settlement Risk under Gross and Net Settlement," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 591-608, August.
    10. Edward J. Green & Richard M. Todd, 2001. "Thoughts on the Fed's role in the payment system," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 25(Win), pages 12-27.
    11. Holthausen, Cornelia & Tapking, Jens, 2007. "Raising rival's costs in the securities settlement industry," Journal of Financial Intermediation, Elsevier, vol. 16(1), pages 91-116, January.
    12. Kahn, Charles M & Roberds, William, 1998. "Payment System Settlement and Bank Incentives," The Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 845-870.
    13. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    14. Fujiki, Hiroshi, 2006. "Institutions of Foreign Exchange Settlement in a Two-Country Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 697-719, April.
    15. Bruce Champ & Bruce D. Smith & Stephen D. Williamson, 1996. "Currency Elasticity and Banking Panics: Theory and Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 828-864, November.
    16. Furfine, Craig H & Stehm, Jeff, 1998. "Analyzing Alternative Intraday Credit Policies in Real-Time Gross Settlement Systems," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 832-848, November.
    17. David C. Mills, Jr, 2004. "Mechanism Design and the Role of Enforcement in Freeman's Model of Payments," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(1), pages 219-236, january.
    18. Temzelides, Ted & Williamson, Stephen D., 2001. "Payments Systems Design in Deterministic and Private Information Environments," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 297-326, July.
    19. Kim McPhail & Anastasia Vakos, 2003. "Excess Collateral in the LVTS: How Much is Too Much?," Staff Working Papers 03-36, Bank of Canada.
    20. Berentsen, Aleksander & Camera, Gabriele & Waller, Christopher, 2007. "Money, credit and banking," Journal of Economic Theory, Elsevier, vol. 135(1), pages 171-195, July.
    21. Charles M. Kahn & William Roberds, 2002. "Payments settlement under limited enforcement: Private versus public systems," FRB Atlanta Working Paper 2002-33, Federal Reserve Bank of Atlanta.
    22. Berentsen, Aleksander & Monnet, Cyril, 2008. "Monetary policy in a channel system," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1067-1080, September.
    23. Alexandra Lai & Nikil Chande & Sean O'Connor, 2006. "Credit in a Tiered Payments System," Staff Working Papers 06-36, Bank of Canada.
    24. Mills, David Jr., 2006. "Alternative central bank credit policies for liquidity provision in a model of payments," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1593-1611, October.
    25. Alejandro García & Ramazan Gençay, 2006. "Risk-Cost Frontier and Collateral Valuation in Securities Settlement Systems for Extreme Market Events," Staff Working Papers 06-17, Bank of Canada.
    26. Ed Nosal & Guillaume Rocheteau, 2006. "The economics of payments," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Feb.
    27. Ping He & Lixin Huang & Randall Wright, 2005. "Money And Banking In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, May.
    28. Martin, Antoine, 2004. "Optimal pricing of intraday liquidity," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 401-424, March.
    29. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "A model of private bank-note issue," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 104-136, January.
    30. Edward J. Green, 1999. "Money and debt in the structure of payments," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 23(Spr), pages 13-29.
    31. Tapking, Jens & Yang, Jing, 2006. "Horizontal and Vertical Integration in Securities Trading and Settlement," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1765-1795, October.
    32. Freeman, Scott, 1996. "Clearinghouse banks and banknote over-issue," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 101-115, August.
    33. Angelini, Paolo, 1998. "An analysis of competitive externalities in gross settlement systems," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 1-18, January.
    34. Cornelia Holthausen & Thomas R¯nde, 2002. "Regulating Access to International Large-Value Payment Systems," The Review of Financial Studies, Society for Financial Studies, vol. 15(5), pages 1561-1586.
    35. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August.
    36. Freixas, Xavier & Parigi, Bruno M & Rochet, Jean-Charles, 2000. "Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 611-638, August.
    37. Darcey McVanel, 2005. "The Impact of Unanticipated Defaults in Canada's Large Value Transfer System," Staff Working Papers 05-25, Bank of Canada.
    38. Kocherlakota, Narayana & Wallace, Neil, 1998. "Incomplete Record-Keeping and Optimal Payment Arrangements," Journal of Economic Theory, Elsevier, vol. 81(2), pages 272-289, August.
    39. Lacker, Jeffrey M. & Weinberg, John A., 2003. "Payment economics: studying the mechanics of exchange," Journal of Monetary Economics, Elsevier, vol. 50(2), pages 381-387, March.
    40. Freixas, Xavier & Parigi, Bruno, 1998. "Contagion and Efficiency in Gross and Net Interbank Payment Systems," Journal of Financial Intermediation, Elsevier, vol. 7(1), pages 3-31, January.
    41. Chakravorti, Sujit, 2000. "Analysis of systemic risk in multilateral net settlement systems," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(1), pages 9-30, January.
    42. Koeppl, Thorsten & Monnet, Cyril & Temzelides, Ted, 2008. "A dynamic model of settlement," Journal of Economic Theory, Elsevier, vol. 142(1), pages 233-246, September.
    43. N/A, 1996. "Note:," Foreign Trade Review, , vol. 31(1-2), pages 1-1, January.
    44. Sargent, Thomas J & Wallace, Neil, 1982. "The Real-Bills Doctrine versus the Quantity Theory: A Reconsideration," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1212-1236, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. James Chapman & Jonathan Chiu & Miguel Molico, 2013. "A Model of Tiered Settlement Networks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(2-3), pages 327-347, March.
    2. Hyung Sun Choi, 2021. "Payments Systems, Liquidity, Collateral, and Central Banking," Korean Economic Review, Korean Economic Association, vol. 37, pages 65-84.
    3. Hyung Sun Choi, 2018. "Inflation Risk, Settlement Cycles, and Monetary Policy," Korean Economic Review, Korean Economic Association, vol. 34, pages 267-282.
    4. Choi, Hyung Sun, 2023. "Money, payments systems, limited participation, and central banking," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).
    5. Tamás Ilyés & Lóránt Varga, 2015. "A General Equilibrium Approach of Retail Payments," MNB Working Papers 2015/3, Magyar Nemzeti Bank (Central Bank of Hungary).
    6. Choi, Hyung Sun, 2019. "Money, debit card, gross-settlement risk, and central banking," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    7. Hyung Sun Choi, 2023. "Payment Systems, Multiple Types of Collateral, Banking, and Collateral Policy," Korean Economic Review, Korean Economic Association, vol. 39, pages 469-493.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.
    2. Williamson, Stephen & Wright, Randall, 2010. "New Monetarist Economics: Models," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 2, pages 25-96, Elsevier.
    3. Kahn, Charles M. & Roberds, William, 2001. "Real-time gross settlement and the costs of immediacy," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 299-319, April.
    4. Ed Nosal & Guillaume Rocheteau, 2006. "The economics of payments," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Feb.
    5. Tore Nilssen, 2011. "Risk externalities in a payments oligopoly," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 10(3), pages 211-234, December.
    6. Chao Gu & Fabrizio Mattesini & Randall Wright, 2016. "Money and Credit Redux," Econometrica, Econometric Society, vol. 84, pages 1-32, January.
    7. Daniel R. Sanches, 2013. "On the welfare properties of fractional reserve banking," Working Papers 13-32, Federal Reserve Bank of Philadelphia.
    8. Callado-Muñoz, Francisco José, 2009. "Risk control measures in payment systems," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(1), pages 1-25, February.
    9. Tomura, Hajime, 2018. "Payment instruments and collateral in the interbank payment system," Journal of Economic Theory, Elsevier, vol. 178(C), pages 82-104.
    10. Allen Head & Junfeng Qiu, 2007. "Elastic Money, Inflation, And Interest Rate Policy," Working Paper 1152, Economics Department, Queen's University.
    11. Stephen D. Williamson & Randall Wright, 2010. "New monetarist economics: methods," Review, Federal Reserve Bank of St. Louis, vol. 92(May), pages 265-302.
    12. Hajime Tomura, 2021. "Nominal contracts and the payment system," The Japanese Economic Review, Springer, vol. 72(2), pages 185-216, April.
    13. Daniel Sanches, 2016. "On The Welfare Properties Of Fractional Reserve Banking," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57, pages 935-954, August.
    14. Lacker, Jeffrey M. & Weinberg, John A., 2003. "Payment economics: studying the mechanics of exchange," Journal of Monetary Economics, Elsevier, vol. 50(2), pages 381-387, March.
    15. Francisco J. Callado Muñoz & Natalia Utrero González, 2013. "Intraday Liquidity and Central Bank Credit in Gross Payment Systems," International Finance, Wiley Blackwell, vol. 16(3), pages 363-392, December.
    16. Benjamin Lester, 2006. "A Model of Interbank Settlement," 2006 Meeting Papers 282, Society for Economic Dynamics.
    17. Mills, David Jr., 2006. "Alternative central bank credit policies for liquidity provision in a model of payments," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1593-1611, October.
    18. Daniel Sanches, 2016. "On the Inherent Instability of Private Money," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 198-214, April.
    19. Antoine Martin & Michael Orlando & David Skeie, 2008. "Payment networks in a search model of money," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 104-132, January.
    20. Pedro Gomis-Porqueras & Daniel Sanches, 2013. "Optimal Monetary Policy in a Model of Money and Credit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(4), pages 701-730, June.

    More about this item

    Keywords

    Payment clearing and settlement systems;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bca:bocawp:07-28. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/bocgvca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.