Optimal pricing of intraday liquidity
AbstractIt is a puzzling fact that many central banks choose to lend intra-day funds at an interest rate of zero (or very close to zero), while the interest rate on overnight funds is much higher. I build a general equilibrium model where intra-day liquidity is needed because it is costly to make precise the time at which payments are received. If liquidity shocks are uninsurable, a necessary and sufficient condition for an equilibrium to be efficient is that the nominal intra-day interest rate be zero. This is true despite the fact that the overnight nominal rate is strictly positive (the reverse of the discount factor). Since a market intra-day rate will not always be zero, this creates a role for the central bank to supply intra-day liquidity. I allow for the possibility of moral hazard and study policies commonly used by central banks to reduce their exposure to risk. I show that collateralized lending achieves the efficient allocation, while, for certain parameters, caps on borrowing cannot prevent moral hazard.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Monetary Economics.
Volume (Year): 51 (2004)
Issue (Month): 2 (March)
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505566
Other versions of this item:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Temzelides, Ted & Williamson, Stephen D., 2001. "Payments Systems Design in Deterministic and Private Information Environments," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 297-326, July.
- Lucas, Robert E, Jr & Stokey, Nancy L, 1987.
"Money and Interest in a Cash-in-Advance Economy,"
Econometric Society, vol. 55(3), pages 491-513, May.
- Robert E. Lucas, Jr. & Nancy L. Stokey, 1985. "Money and Interest in a Cash-in-Advance Economy," NBER Working Papers 1618, National Bureau of Economic Research, Inc.
- Robert E. Lucas Jr. & Nancy L. Stokey, 1984. "Money and Interest in Cash-In-Advance Economy," Discussion Papers 628, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Townsend, Robert M, 1987. "Economic Organization with Limited Communication," American Economic Review, American Economic Association, vol. 77(5), pages 954-71, December.
- Jeffrey M. Lacker, 1997.
"Clearing, settlement, and monetary policy,"
97-01, Federal Reserve Bank of Richmond.
- S.L. Schreft, 1991.
"Welfare-improving credit controls,"
91-01, Federal Reserve Bank of Richmond.
- Correia, Isabel & Teles, Pedro, 1996.
"Is the Friedman rule optimal when money is an intermediate good?,"
Journal of Monetary Economics,
Elsevier, vol. 38(2), pages 223-244, October.
- Correia, Maria Isabel Horta & Teles, Pedro, 1996. "Is the Friedman Rule Optimal When Money is an Intermediate Good?," CEPR Discussion Papers 1287, C.E.P.R. Discussion Papers.
- V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993.
"Optimality of the Friedman Rule in Economies with Distorting Taxes,"
NBER Working Papers
4443, National Bureau of Economic Research, Inc.
- Chari, V. V. & Christiano, Lawrence J. & Kehoe, Patrick J., 1996. "Optimality of the Friedman rule in economies with distorting taxes," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 203-223, April.
- V.V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimality of the Friedman rule in economies with distorting taxes," Staff Report 158, Federal Reserve Bank of Minneapolis.
- Kahn, Charles M. & Roberds, William, 2001.
"Real-time gross settlement and the costs of immediacy,"
Journal of Monetary Economics,
Elsevier, vol. 47(2), pages 299-319, April.
- Charles M. Kahn & William Roberds, 1999. "Real-time gross settlement and the costs of immediacy," Working Paper 98-21, Federal Reserve Bank of Atlanta.
- James McAndrews & Samira Rajan, 2000. "The timing and funding of Fedwire funds transfers," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 17-32.
- Angelini, Paolo, 2000. "Erratum [Are Banks Risk Averse? Intraday Timing of Operations in the Interbank Market]," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 442, August.
- Freeman, Scott, 1999. "Rediscounting under aggregate risk," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 197-216, February.
- Angelini, Paolo, 2000. "Are Banks Risk Averse? Intraday Timing of Operations in the Interbank Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 54-73, February.
- Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, vol. 86(5), pages 1126-38, December.
- Charles M. Kahn & William Roberds, 1999. "The design of wholesale payments networks: the importance of incentives," Economic Review, Federal Reserve Bank of Atlanta, issue Q3, pages 30-39.
- Ruilin Zhou, 2000. "Understanding intraday credit in large-value payment systems," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 29-44.
- Angelini, Paolo, 1998. "An analysis of competitive externalities in gross settlement systems," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 1-18, January.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.