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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.>

Suggested Citation

  • Joydeep Bhattacharya & Joseph H. Haslag & Antoine Martin, 2007. "Why does overnight liquidity cost more than intraday liquidity?," Staff Reports 281, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:281
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Gu, Chao & Guzman, Mark & Haslag, Joseph, 2011. "Production, hidden action, and the payment system," Journal of Monetary Economics, Elsevier, pages 172-182.
    3. ANTOINE MARTIN & JAMES McANDREWS, 2010. "Should There Be Intraday Money Markets?," Contemporary Economic Policy, Western Economic Association International, vol. 28(1), pages 110-122, January.
    4. repec:ctc:serie1:def10 is not listed on IDEAS
    5. Monticini, Andrea & Ravazzolo, Francesco, 2014. "Forecasting the intraday market price of money," Journal of Empirical Finance, Elsevier, pages 304-315.
    6. James Chapman & Jonathan Chiu & Miguel Molico, 2011. "Central bank haircut policy," Annals of Finance, Springer, vol. 7(3), pages 319-348, August.
    7. 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.

    More about this item

    Keywords

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

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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