Title

Why does overnight liquidity cost more than intraday liquidity?

Campus Units

Economics

Document Type

Article

Publication Version

Submitted Manuscript

Publication Date

6-2009

Journal or Book Title

Journal of Economic Dynamics and Control

Volume

33

Issue

6

First Page or Article ID Number

1236

Last Page

1246

DOI

10.1016/j.jedc.2008.12.001

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.

JEL Classification

E31, E51, E58

Comments

This article is published as Why Does Overnight Liquidity Cost More Than Intraday Liquidity? (with A. Martin and J. Haslag),Journal of Economic Dynamics and Control, 33(6), 1236-1246, 2009. DOI: 10.1016/j.jedc.2008.12.001; Posted with permission.

Copyright Owner

Elsevier B.V.

Language

en

File Format

application/pdf

Published Version Working Paper

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