why does overnight liquidity cost more than intraday liquidity abstract in this paper we argue that the observed difference in the cost of intraday and overnight liquidity is part of an optimal payments system design in our environment overnight liquidity affects output while intraday liquidity affects only the distribution of resources between money holders and non money holders the low cost of intraday liquidity is explained by the friedman rule the optimal cost differential achieves the twin objective of reducing the incentive to overuse money at night and encouraging payment risk sharing during the day

liquidity risk and policy options abstract on the basis of a liquidity management model liquidity risks defined as the probability of payment failures in a real time gross settlement rtgs payment system may either stem from liquidity management inefficiencies or insufficient cash balances i will show that penalties charged on the amount of payment failures minimise liquidity risks without interfering with the bank s technology preferences i will instead show that liquidity requirements although as effective as penalties to contain the risk of liquidity shortage may distort the bank s technology preferences and cannot stem liquidity management inefficiencies i will also show that liquidity risks within rtgs payment systems are potentially smaller because they depend more on the liquidity management efficiency than on the randomness of cash inflows and outflows

precautionary reserves and the interbank market large excess reserve balances are held by banks in the u s despite the ability of large banks to closely target end of day balances close to zero we show that the friction faced by small banks to participate in the fed funds market leads to all banks holding precautionary reserves the precautionary motive for reserves can explain that small banks hold relatively large amounts of excess reserves overnight while at the same time lending large amounts to large banks small banks are large net lenders despite their reluctance to lend as large of a percentage of available balances during the day as large banks we also explain an increase in the volatility of the fed funds rate late in the day

analyzing alternative intraday credit policies in real time gross settlement systems this paper examines a central bank s choice of intraday credit policy for real time gross settlement systems formal analysis of central bank objectives and commercial bank payment activity provides insight into both the choice and effects of several possible intraday credit policies observed intraday credit policies are interpreted within the context of the model among g 10 central banks different combinations of prices collateral and quantity limits have been chosen to manage the supply of intraday credit conditions that rationalize these choices are shown to rely on central bank preferences regarding credit risk and systemic risk liquidity management technologies and the cost of collateral

the intraday liquidity management game abstract we use a game theoretical framework to analyze the intraday behavior of banks with respect to settlement of interbank claims in a real time gross settlement setting the game played by banks depends upon the intraday credit policy of the central bank and it encompasses two well known game theoretical paradigms the prisoner s dilemma and the stag hunt the former arises in a collateralized credit regime where banks have an incentive to postpone payments when daylight liquidity is costly an outcome that is socially inefficient the latter arises in a priced credit regime where the postponement of payments can be socially efficient banks are risk neutral but we show that most of the results are unaffected by risk aversion

the intraday price of money evidence from the e mid interbank market we provide empirical evidence based on tick by tick data for the e mid euro area interbank market covering 2003 and 2004 that the overnight interest rate shows a clear downward pattern throughout the operating day thus a positive hourly interest rate half basis point implicitly emerges from the intraday term structure of the overnight rate such a pattern was not detected in the mid 1990s we explain this evolution as an outcome of the recent trend toward real time settlement the estimated intraday interest rate is lower than in the united states this is due to the different cost of central bank daylight credit

variations in market liquidity and the intraday interest rate most central banks offer banks participating in large value real time gross settlement rtgs systems a free intraday overdraft facility to discourage banks from actively managing their daylight liquidity in this paper we ask whether this facility has kept the intraday interest rate at zero using a unique transaction level data set on collateralized interbank loans for 2006 12 we find that during periods of financial distress rates for morning transactions are higher than those in the afternoon moreover this intraday rate correlates with market liquidity suggesting that rates contain a liquidity premium this intraday pattern is reduced but not eliminated by the eurosystem s accommodative liquidity provision

minimal settlement assets in economies with interconnected financial obligations a model is developed where firms belonging to a group are obliged to make payments to one another by using a liquid asset the paper studies the exogenous endowments of this asset that are necessary to assure that all obligations are met conditions are presented under which the degree to which firms are interconnected so that each creditor has more debtors and each debtor has more creditors increases the number of firms that must be endowed with the liquid asset interconnectedness then makes payment defaults more likely by acquiring too many payment obligations firms may also become too interconnected

pricing patent loss and the market for pharmaceuticals dustry the drug price competition and patent term restoration act of 1984 very clearly reflects the determination of policy makers to simultaneously address issues of price control and technical progress the 1984 act increased returns to innovation by extending the period of patent protection to take into account the time between receipt of a patent and food and drug administration fda approval of a drug for sale in the market the 1984 act also reduced the testing requirements for approval of new generic brands of existing chemical entities thus reducing entry barriers in markets where patents have expired the expected outcome from eased entry conditions for generic substitutes was substantially enhanced price competition and lower prices for brand name drugs in fact prices for brand name drugs have tended to increase following entry by generics wagner and duffy 28 examined price changes for top selling generics and name brands they show substantial price increases in brand name prices accompanying large reductions in generic prices as entry of generics occurs grabowski and vernon 9 examined data on 18 major orally administered rug products subject to generic competition between 1983 and 1987 and found that the name brand price increased by an average of 7 one year subsequent to generic entry and 11 two years following generic entry

the budget deficit and the arbitrage pricing theory abstract non linear sur techniques are used to demonstrate that the budget deficit is a priced factor in the arbitrage pricing theory the results also indicate that unexpected increases in the deficit lower stock prices

payment system settlement and bank incentives in this article we consider the relative merits of net versus gross settlement of interbank payments net settlement economizes on the costs of holding non interest bearing reserves but increases moral hazard problems the put option value of default under net settlement can also distort banks investment incentives absent these distortions net settlement dominates gross although the optimal net settlement scheme may involve a positive probability of default article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

liquidity saving mechanisms abstract this paper studies the incentives of participants in a real time gross settlement system with and without the addition of a liquidity saving mechanism lsm participants in the model face a liquidity shock and different costs for delaying payments they trade off the cost of delaying a payment against the cost of borrowing liquidity from the central bank the main contribution of the paper is to show that the design of an lsm has important implications for welfare in particular parameters determine whether the addition of an lsm increases or decreases welfare

information asymmetries and spillover risk in settlement systems abstract i show how information asymmetries between agents in different settlement systems can increase the risk that a problem in one may spill over to another i focus on the strategic behavior of participants who operate in multiple systems as they choose how best to manage their liquidity across the systems in the event of an operational shock in one system these participants may continue to make payments in order to avoid delay costs thereby risking a liquidity sink if they believe they can recycle liquidity from the other unaffected system they are more likely to risk a liquidity sink if they believe banks in the unaffected system will continue making payments early unaware of the operational problem i show that a liquidity saving mechanism lsm in one system may reduce the probability of spillover into the other in this sense i identify a positive externality from the introduction of an lsm

an agent based model of payment systems abstract we lay out and simulate a multi agent multi period model of an rtgs payment system at the beginning of the day banks choose how much costly liquidity to allocate to the settlement process then they use it to execute an exogenous random stream of payment orders if a bank s liquidity stock is depleted payments are queued until new liquidity arrives from other banks imposing costs on the delaying bank we study the equilibrium level of liquidity posted in the system performing some comparative statics and obtaining insights on the efficiency of alternative system configurations

the intraday interest rate under a liquidity crisis the case of august 2007 by analyzing high frequency data for the european interbank market we show that the intraday interest rate implicitly defined by the term structure of the on rate jumped by more than ten times at the outset of the financial turmoil in august 2007 resulting in an inefficiency of the money market this took place despite the provision of unlimited free daylight overdrafts by the ecb on a collateralized basis we suggest that such result may be attributed to an increase of the liquidity premium and of the cost of collateral

illiquidity in the interbank payment system following wide scale disruptions we show how the interbank payment system can become illiquid following wide scale disruptions two forces are at play in such disruptions operational problems and changes in participants behavior if the disruption is large enough hits a key geographic area or hits a too big to fail participant then the smooth processing of payments can break down and central bank intervention might be required to reestablish the socially efficient equilibrium the paper provides a theoretical framework to analyze the effects of events such as the september 11 attack in addition the model can be reinterpreted to analyze shocks to fundamentals that affect the parameters of the intraday liquidity management game we demonstrate this by showing how processing behavior changed in response to heightened credit risk at the time of the lehman brothers failure

production hidden action and the payment system abstract using a modified version of freeman s 1996 payment system model the optimal intraday rate is examined the production set is modified to account for a non degenerate distribution of settlements within a day in addition to the modified production set the consumption set is modified a positive intraday interest rate may be able to implement the planner s allocation

persuasion or information the economics of prescription drug advertising the economic and welfare effects of advertising have been extensively studied over the last half century however these efforts have not led to a consensus either as to the effects or the value of advertising economists continue to reach polar conclusions that appear to be derived mainly from preconceptions of the social desirability of advertising on the one hand is research that emphasizes promotion s ability to create artificial product differentiation and thereby produce informational confusion 1 this line of research stresses the empirical association of extensive advertising with high concentration and high accounting profits evidence judged to support increased market power and entry barrier effects 2 a contrary body of research emphasizes the value of advertising in providing information and hence in promoting competition 3 the empirical findings most consistent with this view are that prices paid by consumers in selected markets are lower with advertising than without it 4

nonlinear pricing and the market for settling payments fedwire funds is a real time gross settlement system that uses a decreasing block pricing scheme to attract nonurgent payments a bank s optimal response to fedwire s pricing depends on its perceived benefits to settling nonurgent payments quickly if the urgency for immediate settlement is great enough a bank responds to marginal price otherwise it responds to average price we find banks respond to average price suggesting that fedwire s advantage over competing services of being able to provide immediate settlement is small moreover attempts to increase demand for fedwire services by lowering the cost of banks final block of payments may be ineffective if there is not a corresponding decrease in average cost

the political economy of the pharmaceutical industry e conomicsis a practical science since its inception as an independent discipline it has probed the major policy issues of the day the topics that aroused the interests of its practitioners have generally been those that presented government officials with critical choices the modern literature on the economics of the pharmaceutical industry is no exception this body of material originated with the investigations of the kefauver committee in late 1959 public interest was aroused by the spectacle of confrontation between committee and industry the record made by this committee and its successors grew to tens of thousands of pages as claims and counterclaims were offered regarding industry conduct and performance the primary line of attack concerned pharmaceutical prices and profits the committee demonstrated that prices generally exceeded direct costs of manufacturing for 22 major pharmaceutical firms in 1958 costs of goods sold were merely 32 percent of total sales u s senate report 1961 p 31 the committee argued that this fact alone demonstrated the presence of monopoly power while the substantial difference between revenues and production costs permitted high expenditures on research and development it also paid for even higher selling outlays moreover reported rates of return after taxes during this period on the order of 21 to 22 percent exceeded twice the average for all manufacturing the industry replied that on the contrary prices were low relative to the value afforded consumers and high returns on successful products were required to balance the losses from the large numbers of unsuccessful ones the relevant concept of marginal costs according to the industry position must include the costs of developing and marketing new products and therefore prices were not excessive at all although it admitted earning substantial profits the industry argued that without these returns research outlays would be limited and the number of new drugs reduced the committee countered that little of social value arose from industry research molecules were manipulated and the new drugs that resulted were therapeutically similar to those already on the market indeed it suggested that much