Economics Seminar（2014-06）

Topic: Financial Intermediaries, Liquidity, and Payments Fraud

Speaker:Yiting Li

Affiliation: National Taiwan University

Time:Tuesday, 1 April. 14:00-15:30pm

Location:Room217, Guanghua Building 2

Abstract：

The possibility of payments fraud is introduced in an economy where banks have a dual role in providing credit and payment services. Banks exclude agents who commit payments fraud, so they need to hold enough cash to finance unexpected spending. The threat of fraud results in an endogenous upper bound on the quantity of deposits that can be traded for consumption goods. Inflation relaxes the liquidity constraint of deposits by raising the self-financing cost of dishonest buyers, and thus, increases loanable funds and output. When overdraft protection is available, inflation induces more nonsufficient fund checks if the rising cost of holding deposits outweighs the overdraft fee. Equilibria showing more severe payments fraud thus suffers lower loanable funds and output. By offering an outlet to avoid the inflation cost, the provision of overdraft coverage sustains the existence of equilibrium when the economy shuts down otherwise.

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