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Author:Baughman, Garth 

Working Paper
Faster Payments: Market Structure and Policy Considerations
This paper reports on a research effort by Federal Reserve staff to examine market structure implications in the still?emerging faster payments market. The analysis and conclusions in this paper are those of the authors and do not indicate official positions of the Board of Governors or Federal Reserve System. Although this paper offers several considerations regarding the U.S. faster payments market, it does not make specific policy recommendations or provide a view on the potential roles, including service provider or other roles, that the Federal Reserve may play in this market.2 Given the nascent state of the faster payments market, many of the matters discussed in this paper are not yet settled. The paper is intended to provide background and a framework for future dialogue and research in this area.
AUTHORS: Rosenbaum, Aaron; Manuszak, Mark D.; Stavins, Joanna; Hayashi, Fumiko; Baughman, Garth; Stewart, Kylie
DATE: 2017-11-01

Report
Faster payments: market structure and policy considerations
The U.S. payments industry is in the process of developing ubiquitous, safe, faster electronic solutions for making a broad variety of business and personal payments. How this market for faster payments will evolve will be shaped by a range of economic forces, such as economies of scale and scope, network effects, switching costs, and product differentiation. Emerging technologies could alter these forces and lead to new organizational arrangements or market structures that are different from those in legacy payment markets to date. In light of this uncertainty, this paper examines three hypothetical market structures that may emerge: a dominant operator environment, a multi-operator environment, and a decentralized environment. Each of these market structures has different implications for the public policy objectives of efficiency, safety, and ubiquity. The paper also considers tools to promote positive outcomes in each market structure.
AUTHORS: Baughman, Garth; Manuszak, Mark D.; Stavins, Joanna; Stewart, Kylie; Hayashi, Fumiko; Rosenbaum, Aaron
DATE: 2017-09-21

Working Paper
A Simple Model of Voluntary Reserve Targets with Tolerance Bands
This note presents a simplifed version of the model of voluntary reserve targets (VRT) developed in Baughman and Carapella (forthcoming), with a Walrasian interbank market. First, the model makes transparent the role of target setting in controlling the market rate. Second, the simplicity of the model allows for an analysis of the interaction between VRT and tolerance bands, which are a common tool for controlling rate variability. We find that the persistent overshooting of interbank rates observed during the Bank of England's experiment with VRT may derive from the interaction between target setting and tolerance bands, a new explanation relative to the literature. We also suggest a simple remedy.
AUTHORS: Baughman, Garth; Carapella, Francesca
DATE: 2019-08

Working Paper
Self-confirming Price Dispersion in Monetary Economies
In a monetary economy, we show that price dispersion arises as an equilibrium outcome without the need for costly simultaneous search or any heterogeneity in preferences, production costs, or search technologies. A distribution of money holdings among buyers makes sellers indifferent across a set of posted prices, leading to a non-degenerate price distribution. This price distribution, in turn, makes buyers indifferent across a range of money balances, rationalizing the non-degenerate distribution of money holdings. We completely characterize the distribution of posted prices and money holdings in any equilibrium. Equilibria with price dispersion admit higher maximum prices than observed in any single-price equilibrium. Also, price dispersion reduces welfare by creating mismatch between posted prices and money balances. Inflation exacerbates this welfare loss by shifting the distribution towards higher prices.
AUTHORS: Baughman, Garth; Rabinovich, Stanislav
DATE: 2018-07-10

Working Paper
Faster Payments : Market Structure and Policy Considerations
The U.S. payments industry is in the process of developing ubiquitous, safe, faster electronic solutions for making a broad variety of business and personal payments. How this market for faster payments will evolve will be shaped by a range of economic forces, such as economies of scale and scope, network effects, switching costs, and product differentiation. Emerging technologies could alter these forces and lead to new organizational arrangements or market structures that are different from those in legacy payment markets to date. In light of this uncertainty, this paper examines three hypothetical market structures that may emerge: a dominant-operator environment, a multi-operator environment, and a decentralized environment. Each of these market structures has different implications for the public policy objectives of efficiency, safety, and ubiquity. The paper also considers tools to promote positive outcomes in each market structure.
AUTHORS: Rosenbaum, Aaron; Baughman, Garth; Manuszak, Mark D.; Stewart, Kylie; Hayashi, Fumiko; Stavins, Joanna
DATE: 2017-09-25

Working Paper
Voluntary Reserve Targets
This paper updates the standard workhorse model of banks' reserve management to include frictions inherent to money markets. We apply the model to study monetary policy implementation through an operating regime involving voluntary reserve targets (VRT). When reserves are abundant, as is the case following the unconventional policies adopted during the recent financial crisis, operating regimes based on reserve requirements may lead to a collapse in interbank trade. We show that, no matter the relative abundance of reserves, VRT encourage market activity and support the central bank's control over interest rates. In addition to this characterization, we consider (i) the impact of routine and non-routine liquidity injections by the central bank on market outcomes and (ii) a comparison with the implementation framework currently adopted by the Federal Reserve. Overall, we show that a VRT framework may provide several advantages over other frameworks.
AUTHORS: Baughman, Garth; Carapella, Francesca
DATE: 2018-05-07

Working Paper
Deadlines and Matching
Deadlines and fixed end dates are pervasive in matching markets including school choice, the market for new graduates, and even financial markets such as the market for federal funds. Deadlines drive fundamental non-stationarity and complexity in behavior, generating significant departures from the steady-state equilibria usually studied in the search and matching literature. I consider a two-sided matching market with search frictions where vertically differentiated agents attempt to form bilateral matches before a deadline. I give conditions for existence and uniqueness of equilibria, and show that all equilibria exhibit an "anticipation effect" where less attractive agents become increasingly choosy over time, preferring to wait for the opportunity to match with attractive agents who, in turn, become less selective as the deadline approaches. When payoffs accrue after the deadline, or agents do not discount, a sharp characterization is available: at any point in time, the market is segmented into a first class of matching agents and a second class of waiting agents. This points to a different interpretation of unraveling observed in some markets and provides a benchmark for other studies of non-stationary matching. A simple intervention -- a small participation cost -- can dramatically improve efficiency.
AUTHORS: Baughman, Garth
DATE: 2016-02-24

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