An Economic Analysis of Liquidity-Saving Mechanisms

[...]This article outlines a different approach to the study ofLSMs in a payments system. It examines a theoretical modelof the behavior of parties, which for simplicity we refer to asbanks. Each bank has particular motivations and constraints;as a result, its behavior can be determined as an equilibrium outcome in response to the incentives it faces. The theoreticalapproach has the advantage of allowing banks’ reactions toalternative payments system designs to be determined withina theoretical model, rather than be assumed by the researcher.This approach also allows outcomes to be comparedconsistently across a number of designs.[...]