Why does overnight liquidity cost more than intraday liquidity?

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Why does overnight liquidity cost more than intraday liquidity?

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Joydeep Bhattacharya
Joseph H. Haslag
Antoine Martin

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Abstract

In this paper, we argue that the observed difference in the cost of intraday and overnight liquidity is part of an optimal payments system design. In our environment, the interest charged on overnight liquidity affects output, while the cost of intraday liquidity only affects the distribution of resources between money holders and non-money holders. The low cost of intraday liquidity follows from the Friedman rule, but with respect to overnight liquidity, it is optimal to deviate from the Friedman rule. The cost differential simultaneously reduces the incentive to overuse money and encourages risk sharing.>

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 281.

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Date of creation: 2007
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Handle: RePEc:fip:fednsr:281

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Paper
- Bhattacharya, Joydeep & Haslag, Joesph & Martin, Antoine, 2009. "Why does overnight liquidity cost more than intraday liquidity?," Staff General Research Papers 13096, Iowa State University, Department of Economics.
- Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2007. "Why Does Overnight Liquidity Cost More Than Intraday Liquidity?," Staff General Research Papers 12760, Iowa State University, Department of Economics. [Downloadable!]

This paper has been announced in the following NEP Reports:

NEP-ALL-2007-05-12 (All new papers)
NEP-BAN-2007-05-12 (Banking)
NEP-CBA-2007-05-12 (Central Banking)
NEP-MAC-2007-05-12 (Macroeconomics)
NEP-MON-2007-05-12 (Monetary Economics)

References listed on IDEAS
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Other versions:
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Other versions:
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Joseph H. Haslag & Antoine Martin, 2005. "Optimality of the Friedman rule in an overlapping generations model with spatial separation," Staff Reports 225, Federal Reserve Bank of New York. [Downloadable!]
Other versions:
- Joseph H. Haslag & Antoine Martin, 2007. "Optimality of the Friedman Rule in an Overlapping Generations Model with Spatial Separation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1741-1758, October. [Downloadable!] (restricted)
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- Champ, B. & Smith, B.D., 1991. "Currency Elasticity and Banking Panics: theory and Evidence," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9109, University of Western Ontario, The Centre for the Study of International Economic Relations.
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Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2005. "Sub-optimality of the Friedman rule in Townsend's turnpike and stochastic relocation models of money: Do finite lives and initial dates matter?," Staff General Research Papers 12265, Iowa State University, Department of Economics.
Other versions:
- Bhattacharya, Joydeep & Haslag, Joseph H. & Martin, Antoine, 2006. "Sub-optimality of the Friedman rule in Townsend's turnpike and stochastic relocation models of money: Do finite lives and initial dates matter?," Journal of Economic Dynamics and Control, Elsevier, vol. 30(5), pages 879-897, May. [Downloadable!] (restricted)
Bech, Morten L. & Garratt, Rod, 2003. "The intraday liquidity management game," Journal of Economic Theory, Elsevier, vol. 109(2), pages 198-219, April. [Downloadable!] (restricted)
Other versions:
- Morten Bech & Rod Garratt, 2001. "The Intraday Liquidity Management Game," University of California at Santa Barbara, Economics Working Paper Series 18-01, Department of Economics, UC Santa Barbara. [Downloadable!]
Joseph H. Haslag & Joydeep Bhattacharya & Antoine Martin, 2007. "Money, output and the payment system: Optimal monetary policy in a model with hidden effort," Working Papers 0704, Department of Economics, University of Missouri. [Downloadable!]
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Carlos E. da Costa & Iván Werning, 2008. "On the Optimality of the Friedman Rule with Heterogeneous Agents and Nonlinear Income Taxation," Journal of Political Economy, University of Chicago Press, vol. 116(1), pages 82-112, 02. [Downloadable!] (restricted)
Joydeep Bhattacharya & Joseph H. Haslag & Antoine Martin, 2005. "Heterogeneity, Redistribution, And The Friedman Rule," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 437-454, 05. [Downloadable!] (restricted)
Other versions:
- Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2004. "Heterogeneity, Redistribution, and the Friedman Rule," Staff General Research Papers 11371, Iowa State University, Department of Economics.
- Joydeep Bhattacharya & Joseph H. Haslag & Antoine Martin, 2004. "Heterogeneity, redistribution, and the Friedman rule," Research Working Paper RWP 04-01, Federal Reserve Bank of Kansas City. [Downloadable!]
Kahn, Charles M. & Roberds, William, 2007. "Transferability, finality, and debt settlement," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 955-978, May. [Downloadable!] (restricted)

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Antoine Martin & James McAndrews, 2008. "Should there be intraday money markets?," Staff Reports 337, Federal Reserve Bank of New York. [Downloadable!]

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