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Why does overnight liquidity cost more than intraday liquidity?

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  • Joydeep Bhattacharya
  • Joseph H. Haslag
  • Antoine Martin

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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Keywords: Bank liquidity ; Payment systems ; Friedman; Milton ; Banks and banking; Central;

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  1. Antinolfi, Gaetano & Keister, Todd, 2006. "Discount Window Policy, Banking Crises, And Indeterminacy Of Equilibrium," Macroeconomic Dynamics, Cambridge University Press, vol. 10(01), pages 1-19, February.
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  19. 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.
  20. 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.
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Citations

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Cited by:
  1. ANTOINE MARTIN & JAMES McANDREWS, 2010. "Should There Be Intraday Money Markets?," Contemporary Economic Policy, Western Economic Association International, vol. 28(1), pages 110-122, 01.
  2. Marius Jurgilas & Filip Zikes, 2013. "Implicit intraday interest rate in the UK unsecured overnight money market," Working Paper 2013/09, Norges Bank.
  3. James Chapman, Jonathan Chiu, and Miguel Molico, 2010. "Central Bank Haircut Policy," Working Papers 10-23, Bank of Canada.
  4. Chao Gu & Joseph H. Haslag & Mark Guzman, 2010. "Production, Hidden Action, and the Payment System," Working Papers 1004, Department of Economics, University of Missouri.
  5. Andrea Monticini & Francesco Ravazzolo, 2011. "Forecasting the intraday market price of money," Working Paper 2011/06, Norges Bank.
  6. Baglioni, Angelo & Monticini, Andrea, 2010. "The intraday interest rate under a liquidity crisis: The case of August 2007," Economics Letters, Elsevier, vol. 107(2), pages 198-200, May.

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