Why Does Overnight Liquidity Cost More Than Intraday Liquidity?

Joydeep Bhattacharya, Joseph Haslag and Antoine Martin

Staff General Research Papers Archive 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, 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.

Keywords: Friedman rule; monetary policy; Overnight liquidity; intraday liquidity; random-relocation models (search for similar items in EconPapers)
JEL-codes: E31 E51 E58 (search for similar items in EconPapers)
Date: 2007-03-20
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published in Journal of Economic Dynamics and Control, June 2009, vol. 33 no. 6, pp. 1236-1246

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http://www2.econ.iastate.edu/papers/p1760-2007-03-20.pdf (application/pdf)

Related works:
Journal Article: Why does overnight liquidity cost more than intraday liquidity? (2009)
Working Paper: Why does overnight liquidity cost more than intraday liquidity? (2009)
Working Paper: Why does overnight liquidity cost more than intraday liquidity? (2007)
Working Paper: Why does overnight liquidity cost more than intraday liquidity? (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:13096

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