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value payments systems. …
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We investigate the role of settlement in a dynamic model of a payment system where the ability of participants to perform certain welfare-improving transactions is subject to random and unobservable shocks. In the absence of settlement, the full information first-best allocation cannot be...
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-saving mechanism (LSM). We show that an LSM allows banks to economize on collateral while also providing incentives to submit payments … earlier. The reason is that, in our model, an LSM allows payments to be matched and offset, helping to settle payment cycles …
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