Banks, Money and the Zero Lower Bound
40 Pages Posted: 11 Sep 2018
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: Suggested Citation