Institutions of Foreign Exchange Settlement in a Two-Country Model. The Economics of Payments March 31, 2004 Federal Reserve Bank of Atlanta Hiroshi Fujiki Bank of Japan, IMES (An usual disclaimer applies). An Illustration.
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The Economics of Payments
March 31, 2004
Federal Reserve Bank of Atlanta
Hiroshi FujikiBank of Japan, IMES
(An usual disclaimer applies)
Early-arriving consumers from economy 1 can wait for the arrival of their counterparties from economy 2 (Payment Versus Payment).
Suppliers can wait for cash delivery. Consumers purchase negotiable certificate of deposit (NCD) which can be withdrawn at the end of day in terms of foreign currency. Consumers transfer their deposits to suppliers at the end of the day.
Consumers and suppliers can use the same currency. Shut down the foreign exchange market (Currency Union)!
Young debtors eat a part of their endowment, then visit young creditors (Debtors do not have money).
Young debtors issue debts, buy young creditors’ good.
Young debtors go back their villages.
Young debtors sell goods to old creditors, get money, save money to pay back their debts when old.
The timings of arrivals to the foreign exchange may differ due to the timing of domestic credit market settlement.