Working Paper No. 428
By Tomohiro Ota
This paper studies the optimal intraday pricing in payment systems and its impact on banks’ payment behaviour and intraday liquidity management. A model is developed to compare the performance of two different mechanisms to reduce payment delay: a throughput guideline and a tariff that varies over time, and concludes that a linear time-varying tariff achieves a better outcome unless the payment system experiences a system-wide liquidity shock. We show that settlement delay can be socially efficient, contrary to general understanding of the literature, when it reduces the aggregate cost of liquidity. The theoretical model suggests that the tariff eliminates the inefficient settlement delay that does not contribute to lowering the cost, while leaving the socially efficient delay.