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Why Does Overnight Liquidity Cost More Than Intraday Liquidity?

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  • Bhattacharya, Joydeep
  • Haslag, Joseph
  • Martin, Antoine

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, overnight liquidity affects output while intraday liquidity affects only the distribution of resources between money holders and non-money holders. The low cost of intraday liquidity is explained by the Friedman rule. The optimal cost differential achieves the twin objective of reducing the incentive to overuse money at night and encouraging payment-risk sharing during the day.

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File URL: http://www.econ.iastate.edu/sites/default/files/publications/papers/p1760-2007-03-20.pdf
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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 13096.

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Date of creation: 20 Mar 2007
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Publication status: Published in Journal of Economic Dynamics and Control, June 2009, vol. 33 no. 6, pp. 1236-1246
Handle: RePEc:isu:genres:13096

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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Keywords: Friedman rule; monetary policy; Overnight liquidity; intraday liquidity; random-relocation models;

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References

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  1. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2002. "Optimal Indirect and Capital Taxation," NajEcon Working Paper Reviews, www.najecon.org 391749000000000449, www.najecon.org.
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  5. Antoine Martin, 2002. "Optimal pricing of intra-day liquidity," Research Working Paper, Federal Reserve Bank of Kansas City RWP 02-02, Federal Reserve Bank of Kansas City.
  6. 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, Elsevier, vol. 30(5), pages 879-897, May.
  7. 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.
  8. Angelini, Paolo, 1998. "An analysis of competitive externalities in gross settlement systems," Journal of Banking & Finance, Elsevier, Elsevier, vol. 22(1), pages 1-18, January.
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  10. 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.
  11. 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.
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  21. 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).
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Citations

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Cited by:
  1. Marius Jurgilas & Filip Zikes, 2013. "Implicit intraday interest rate in the UK unsecured overnight money market," Working Paper, Norges Bank 2013/09, Norges Bank.
  2. 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.
  3. 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).
  4. 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, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE) ief0083, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  5. James Chapman & Jonathan Chiu & Miguel Molico, 2011. "Central bank haircut policy," Annals of Finance, Springer, Springer, vol. 7(3), pages 319-348, August.
  6. 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.

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