Why Does Overnight Liquidity Cost More Than Intraday Liquidity?

Joydeep Bhattacharya (), Joseph Haslag () and Antoine Martin ()

Staff General Research Papers from Iowa State University, Department of Economics

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 and it is optimal to deviate from the the Friedman rule with respect to overnight liquidity. The cost differential simultaneously reduces the incentive to overuse money and encourages risk sharing.

Keywords: Friedman rule; monetary policy; random-relocation models. (search for similar items in EconPapers)
JEL-codes: E5 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2007-03-20
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http://www.econ.iastate.edu/research/webpapers/paper_12760_07004.pdf (application/pdf)

Related works:
Working Paper: Why does overnight liquidity cost more than intraday liquidity? (2009)
Working Paper: Why does overnight liquidity cost more than intraday liquidity? (2007)
Journal Article: Why does overnight liquidity cost more than intraday liquidity? (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:isu:genres:12760

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