Document Type

Working Paper

Publication Date

3-20-2007

Working Paper Number

WP #07004, March 2007; Old working paper #13096

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.

Publication Status

Published in Journal of Economic Dynamics and Control, Vol. 33 no. 6 (June 2009): 1236-1246.

JEL Classification

E31, E51, E58

File Format

application/pdf

Length

24 pages

Included in

Economics Commons

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