Money, output and the payment system: Optimal monetary policy in a model with hidden effort

Joe Haslag (), Joydeep Bhattacharya and Antoine Martin
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Joe Haslag: Department of Economics, University of Missouri-Columbia, https://economics.missouri.edu/people/haslag

No 704, Working Papers from Department of Economics, University of Missouri

Abstract: We propose a new explanation for the observed difference in the cost of intraday and overnight liquidity. We argue that the low cost of intraday liquidity is an application of the Friedman rule in an environment where a deviation of the Friedman rule is optimal with respect to overnight liquidity. In our environment the cost of overnight liquidity affects output while the cost of intraday liquidity only redistributes resources between money holders and non-money holders. We show that it is optimal to set a high overnight rate to reduce the incentives to overuse money. In contrast, intraday liquidity should have a low cost to provide risk-sharing.

Keywords: Friedman rule; monetary policy; random-relocation models (search for similar items in EconPapers)
JEL-codes: E31 E51 E58 (search for similar items in EconPapers)
Pages: 23 pgs.
Date: 2007-03-14
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:umc:wpaper:0704

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