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Why does overnight liquidity cost more than intraday liquidity? Author info | Abstract | Publisher info | Download info | Related research | Statistics Joydeep Bhattacharya
Joseph H. Haslag
Antoine Martin
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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: 2007Date of revision:
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Keywords: Bank liquidity ; Payment systems ; Friedman ; Milton ; Banks and banking ; Central ; Other versions of this item:
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 :
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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.
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"The intraday liquidity management game ,"
Journal of Economic Theory ,
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Other versions: 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.
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Freeman, Scott, 1996.
"The Payments System, Liquidity, and Rediscounting ,"
American Economic Review ,
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David C. Mills, Jr, 2004.
"Mechanism Design and the Role of Enforcement in Freeman's Model of Payments ,"
Review of Economic Dynamics ,
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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.
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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.
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references Cited by : (explanations , 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.)
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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