Banks, Money and the Zero Lower Bound

40 Pages Posted: 11 Sep 2018

Multiple version iconThere are 2 versions of this paper

Date Written: August 2, 2018


We study a New Keynesian model where banks create deposits through loans, subject to increasing marginal cost of lending. Banks do not intermediate commodity deposits between savers and borrowers, instead they offer a payment system that intermediates ledger-entry deposits between spenders and spenders. We discuss three implications. First, non-banks’ aggregate purchasing power consists not only of their income but also of new loans/deposits. Second, near the ZLB policy rate reductions compress spreads, and thereby reduce bank profitability, deposit creation and output. Third, near the ZLB Phillips curves are flatter because lower factor cost inflation is partly offset by inflationary credit rationing.

Keywords: Banks, financial intermediation, endogenous money creation, bank loans, bank deposits, money demand, deposits-in-advance, Phillips curve, zero lower bound, monetary policy rules

JEL Classification: E41, E44, E51, G21

Suggested Citation

Kumhof, Michael and Wang, Xuan, Banks, Money and the Zero Lower Bound (August 2, 2018). Saïd Business School WP 2018-16. Available at SSRN: or

Michael Kumhof

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Xuan Wang (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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