Production, hidden action, and the payment system

Gu, C., Guzman, M. and Haslag, J. (2011) Production, hidden action, and the payment system. Journal of Monetary Economics, 58 (2). pp. 172-182. ISSN 0304-3932 doi: 10.1016/j.jmoneco.2011.03.004

Abstract/Summary

In this paper, we study a model economy that examines the optimal intraday rate. In Freeman’s (1996) paper, he shows that the efficient allocation can be implemented by adopting a policy in which the intraday rate is zero. We modify the production set and show that such a model economy can account for the non-uniform distribution of settlements within a day. In addition, by modifying both the consumption set and the production set, we show that the central bank may be able to implement the planner’s allocation with a positive intraday interest rate.