The endogenous creation of bank credit and of deposit money is modeled. If banks have a limited ability to commit to making interbank loans, then, in order for bank deposits to be accepted as liquid assets, an upper bound is placed upon the size of each bank's asset portfolio, where the bound is...

After the collapse of the asset price bubble, Japanese banks are said to have been reluctant to write off bad loans, even in cases where there is little prospect of borrower firms being able to repay the loans extended. This phenomenon is known as forbearance lending. We illustrate this using a...