- Monetary Policy Implementation and Payment System Modernization
Bank of Canada
In this paper, we adapt the traditional model to include paying after hours when participants do not have access to central bank lending and deposit facilities. If they do not have access to the central bank, they cannot send a payment after hours unless they have the funds available. This leads to what is called a “precautionary demand” for more funds to reduce the chance that payments cannot take place. This precautionary demand can cause the overnight interest rate to go up.