The Use of Simulations as an Analytical Tool for Payment Systems

Simulations are among the analytical tools in payment systems analysis. They can be used to overcome epistemological weaknesses of models and calibrations, and they are virtual experiments that do not affect the real performance of payment systems. The chapter is intended to give an inside view into the use of simulations as an analysis tool for payment systems as well as settlement systems. Section 1 highlights the basic features of payment systems in order to explain the usefulness of, and the most important questions addressed by, simulations. Based on these features, an epistemological assessment of simulations versus other analytical tools will show the range and limits of simulations (section 2). Following the historic development, the use of simulations for functional development will be explained in section 3, before dealing with oversight aspects (section 4). Finally, in section 5, the authors list a couple of practical tools to do simulations and to discuss tendencies in simulation tools and speculate on the future direction of research. 1. BASIC FEATURES OF PAYMENT SYSTEMS The economics of payment systems requires a sound knowledge and understanding of institutional features. Payment economics mainly deals with features that were formerly subsumed under the term “transaction costs.” Without transaction costs such as costs for searching, transferring, monitoring, bookkeeping, etc., neither the existence of money nor that of payment systems would be explainable. Therefore, economics of payment systems deals by definition with deviations from a pure economic theory in the sense of an Arrow-Debreu-World. In addition, knowledge of institutional features of payments system is at the very heart of it. Therefore, we will first have a look at the prominent features of payment systems in our times. Thereby, a first idea about the complexity of real existent payment systems and the considerable amount of variations may come up2. Martin Diehl1 Deutsche Bundesbank, Germany