Introduction

By McAndrews, James | Federal Reserve Bank of New York Economic Policy Review, September 2008 | Go to article overview

Introduction


McAndrews, James, Federal Reserve Bank of New York Economic Policy Review


Simply put, payments settle things. A payment is typically the final step in a sequence of activities that make up an economic or financial trade. Because the parties to the trade look forward to this final step, payments are the focus of their expectations about timing, risks, and costs. The more certain it is that this final step of a trade will take place, the easier it is for trades to occur and for people to undertake efficient economic actions.

As the world economy continues to grow, the share devoted to financial services has risen relative to the share representing other economic activities. Payments have increased in importance as that trend has manifested itself, and their contribution to the global economy is likely to increase as well.

The rising importance of payments to economic activity in general is a significant development--especially for banks and central banks as providers of payment services. Bank customers frequently rely on credit provided by their institutions to complete payments, whether they are using credit cards or other payment instruments. Similarly, banks often rely on very-short-term credit provided by central banks to make payments. Needless to say, whenever financial institutions provide credit, they must manage risk to prevent excessive risk taking. Managing payments is therefore part of a larger risk management process in the financial sector.

This special issue of the Economic Policy Review is devoted to the economics of payments. The wide-ranging articles in this collection investigate large-value payments systems, both theoretically and empirically; risk in retail payments systems; payments system development trends across countries; and the interaction of the provision of reserves by central banks and the operation of payments systems. They illustrate the diversity of interests and methods that economists have developed for studying payment activities.

The contributions to this volume center on three broad themes: theoretical models of money and payments, empirical analyses of trends in large-value payments, and risk management in payments systems.

The theoretical theme is examined in three articles--by Morten L. Bech; Antoine Martin and James McAndrews; and Todd Keister, Antoine Martin, and James McAndrews. The Bech study and the Martin-McAndrews study, both focusing on large-value payments systems, explore the strategic incentives for banks to submit payments on time in different economic environments. They consider how the incentives are affected by different central bank policies, such as the terms under which intraday credit is provided. …

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