Template-type: ReDIF-Paper 1.0
Author-Name: Lukas Altermatt
Author-Name-First: Lukas
Author-Name-Last: Altermatt
Author-Name: Hugo van Buggenum
Author-Name-First: Hugo
Author-Name-Last: van Buggenum
Author-Name: Lukas Voellmy
Author-Name-First: Lukas
Author-Name-Last: Voellmy
Author-Person: pvo254
Title: Money creation in a neoclassical economy: equilibrium multiplicity and the liquidity trap
Abstract: We introduce banks that issue liquid deposits backed by illiquid bonds and capital into an otherwise standard cash-in-advance economy. Liquidity transformation can lead to multiple steady-state equilibria with different interest rates and real outcomes. Whenever multiple equilibria exist, one of them is a 'liquidity trap', in which nominal bond rates equal zero and banks are indifferent between holding bonds or reserves. Whether economic activity is higher in a liquidity trap or in a (coexisting) equilibrium with positive interest rates is ambiguous, but the liquidity trap equilibrium is more likely to go in hand with inefficient overinvestment. While liquidity transformation can lead to macroeconomic instability in the form of multiple equilibria, aggregate consumption is higher than in a cash-only economy, regardless of which equilibrium is selected.

Length: 52 pages
Creation-Date: 2025
Contact-Email: forschung@snb.ch
File-URL: https://www.snb.ch/en/publications/research/working-papers/2025/working_paper_2025_04
File-Format: text/html
Number: 2025-04
Classification-JEL: E4, E5
Keywords: Banks, Liquidity, Monetary policy, Zero-lower bound
Handle: RePEc:snb:snbwpa:2025-04