Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/60519
Authors: 
Bhattacharya, Joydeep
Haslag, Joseph H.
Martin, Antoine
Year of Publication: 
2007
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 281
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, but with respect to overnight liquidity, it is optimal to deviate from the Friedman rule. The cost differential simultaneously reduces the incentive to overuse money and encourages risk sharing.
Subjects: 
Friedman rule, overnight liquidity, intraday liquidity
JEL: 
E31
E51
E58
Document Type: 
Working Paper

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