Advanced Search
MyIDEAS: Login to save this paper or follow this series

Why does overnight liquidity cost more than intraday liquidity?

Contents:

Author Info

  • 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.>

Download Info

If 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.
File URL: http://www.newyorkfed.org/research/staff_reports/sr281.html
Download Restriction: no

File URL: http://www.newyorkfed.org/research/staff_reports/sr281.pdf
Download Restriction: no

Bibliographic Info

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

as in new window
Length:
Date of creation: 2007
Date of revision:
Handle: RePEc:fip:fednsr:281

Contact details of provider:
Postal: 33 Liberty Street, New York, NY 10045-0001
Email:
Web page: http://www.newyorkfed.org/
More information through EDIRC

Order Information:
Email:
Web: http://www.ny.frb.org/rmaghome/staff_rp/

Related research

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

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Edward J. Green, 1999. "Money and debt in the structure of payments," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Spr, pages 13-29.
  2. Joydeep Bhattacharya & Joseph H. Haslag & Antoine Martin, 2004. "Heterogeneity, redistribution, and the Friedman rule," Research Working Paper, Federal Reserve Bank of Kansas City RWP 04-01, Federal Reserve Bank of Kansas City.
  3. Glenn D. Rudebusch & Lars E.O. Svensson, 1999. "Eurosystem Monetary Targeting: Lessons from U.S. Data," NBER Working Papers 7179, National Bureau of Economic Research, Inc.
  4. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2002. "Optimal Indirect and Capital Taxation," Levine's Working Paper Archive 391749000000000449, David K. Levine.
  5. 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, University of Chicago Press, vol. 116(1), pages 82-112, 02.
  6. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  7. Mills, David Jr., 2006. "Alternative central bank credit policies for liquidity provision in a model of payments," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(7), pages 1593-1611, October.
  8. Jeffrey M. Lacker, 1997. "Clearing, settlement, and monetary policy," Working Paper, Federal Reserve Bank of Richmond 97-01, Federal Reserve Bank of Richmond.
  9. Bruce Champ & Bruce D. Smith & Stephen D. Williamson, 1996. "Currency Elasticity and Banking Panics: Theory and Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 828-64, November.
  10. Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, American Economic Association, vol. 86(5), pages 1126-38, December.
  11. Bhattacharya, Joydeep & Singh, Rajesh, 2008. "Usefulness Of The Constrained Planning Problem In A Model Of Money," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 12(04), pages 503-525, September.
  12. Martin, Antoine, 2004. "Optimal pricing of intraday liquidity," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(2), pages 401-424, March.
  13. Stacey L. Schreft & Bruce D. Smith, 1994. "Money, banking, and capital formation," Working Paper, Federal Reserve Bank of Richmond 94-05, Federal Reserve Bank of Richmond.
  14. Kahn, Charles M. & Roberds, William, 2007. "Transferability, finality, and debt settlement," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(4), pages 955-978, May.
  15. David C. Mills, Jr, 2004. "Mechanism Design and the Role of Enforcement in Freeman's Model of Payments," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(1), pages 219-236, january.
  16. Bech, Morten L. & Garratt, Rod, 2001. "The Intraday Liquidity Management Game," University of California at Santa Barbara, Economics Working Paper Series qt0m6035wg, Department of Economics, UC Santa Barbara.
  17. 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.
  18. Ruilin Zhou, 2000. "Understanding intraday credit in large-value payment systems," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 29-44.
  19. Huberto M. Ennis & John A. Weinberg, 2007. "Interest on reserves and daylight credit," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Spr, pages 111-142.
  20. Antinolfi, Gaetano & Keister, Todd, 2006. "Discount Window Policy, Banking Crises, And Indeterminacy Of Equilibrium," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 10(01), pages 1-19, February.
  21. Townsend, Robert M, 1987. "Economic Organization with Limited Communication," American Economic Review, American Economic Association, American Economic Association, vol. 77(5), pages 954-71, December.
  22. Joseph H. Haslag & Antoine Martin, 2005. "Optimality of the Friedman rule in an overlapping generations model with spatial separation," Staff Reports, Federal Reserve Bank of New York 225, Federal Reserve Bank of New York.
  23. 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, Department of Economics, University of Missouri 0704, Department of Economics, University of Missouri.
  24. Angelini, Paolo, 1998. "An analysis of competitive externalities in gross settlement systems," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 1-18, January.
  25. Leonardo Bartolini & Svenja Gudell & Spence Hilton & Krista Schwarz, 2005. "Intraday trading in the overnight federal funds market," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 11(Nov).
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. James Chapman, Jonathan Chiu, and Miguel Molico, 2010. "Central Bank Haircut Policy," Working Papers, Bank of Canada 10-23, Bank of Canada.
  2. Angelo Baglioni & Andrea Monticini, 2008. "The intraday interest rate under a liquidity crisis: the case of August 2007," DISCE - Quaderni dell'Istituto di Economia e Finanza ief0083, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  3. Antoine Martin & James McAndrews, 2008. "Should there be intraday money markets?," Staff Reports, Federal Reserve Bank of New York 337, Federal Reserve Bank of New York.
  4. Chao Gu & Joseph H. Haslag & Mark Guzman, 2010. "Production, Hidden Action, and the Payment System," Working Papers, Department of Economics, University of Missouri 1004, Department of Economics, University of Missouri.
  5. Andrea Monticini & Francesco Ravazzolo, 2014. "Forecasting the intraday market price of money," DISCE - Working Papers del Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE) def10, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  6. Jurgilas, Marius & Zikes, Filip, 2012. "Implicit intraday interest rate in the UK unsecured overnight money market," Bank of England working papers 447, Bank of England.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fip:fednsr:281. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Farber).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.