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Why does overnight liquidity cost more than intraday liquidity?

Author

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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.

Suggested Citation

  • Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2009. "Why does overnight liquidity cost more than intraday liquidity?," ISU General Staff Papers 200906010700001144, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:200906010700001144
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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. Fabio Ortega-Castro & Freddy Cepeda-López & Constanza Martínez-Ventura, 2021. "Heterogeneidad en el uso de las fuentes de liquidez intradía en el sistema de pagos de alto valor," Borradores de Economia 1166, Banco de la Republica de Colombia.
    3. Gu, Chao & Guzman, Mark & Haslag, Joseph, 2011. "Production, hidden action, and the payment system," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 172-182, March.
    4. 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.
    5. repec:ctc:serie1:def10 is not listed on IDEAS
    6. Christian Pfister, 2018. "(Real-)Time Is Money," Working papers 675, Banque de France.
    7. Monticini, Andrea & Ravazzolo, Francesco, 2014. "Forecasting the intraday market price of money," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 304-315.
    8. James Chapman & Jonathan Chiu & Miguel Molico, 2011. "Central bank haircut policy," Annals of Finance, Springer, vol. 7(3), pages 319-348, August.
    9. Huber, Samuel & Kim, Jaehong, 2020. "An overlapping generations model for monetary policy analysis," European Economic Review, Elsevier, vol. 125(C).
    10. Marius Jurgilas & Filip Zikes, 2012. "Implicit intraday interest rate in the UK unsecured overnight money market," Bank of England working papers 447, Bank of England.
    11. Puriya Abbassi & Falko Fecht & Johannes Tischer, 2017. "Variations in Market Liquidity and the Intraday Interest Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(4), pages 733-765, June.
    12. Jurgilas, Marius & Žikeš, Filip, 2014. "Implicit intraday interest rate in the UK unsecured overnight money market," Journal of Financial Intermediation, Elsevier, vol. 23(2), pages 232-254.
    13. S√Âbastien Kraenzlin & Thomas Nellen, 2010. "Daytime Is Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(8), pages 1689-1702, December.
    14. Adam Ashcraft & James Mcandrews & David Skeie, 2011. "Precautionary Reserves and the Interbank Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 311-348, October.

    More about this item

    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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