Charles M. Kahn and William Roberds
Federal Reserve Bank of Atlanta
Working Paper 98-21a
Revised November 1999

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Using a neoclassical monetary model, we investigate the welfare cost of a payment system that operates as a real-time gross settlement (RTGS) system. We illustrate how the cost of such systems does not ultimately derive from factors such as "payments gridlock" but instead from the credit constraints imposed by RTGS. We also investigate the welfare consequences of various approaches to the allocation of daylight credit by central banks. The two most popular approaches, collateralization and charging an administered intraday interest rate, are shown to be effective along some dimensions but flawed in others.

JEL classification: E42, G21, N20

Key words: payments, money, real-time gross settlement

The authors thank Scott Freeman, David Humphrey, David Marshall, Stacey Schreft, Bruce Smith, David Van Hoose, and seminar participants at Hitotsubashi University, the Hong Kong University of Science and Technology, the Clarence Tow Conference at the University of Iowa, the University of Texas, and the Federal Reserve Banks of Chicago, New York, and San Francisco for helpful discussions and comments. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Charles M. Kahn, Department of Finance, University of Illinois, 217 David Kinley Hall, 1407 West Gregory Drive, Champaign, Illinois 61801, 217/333-2813,; or William Roberds, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, NE, Atlanta, Georgia 30309-4470, 404/498-8970, 404/498-8956 (fax),

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