"Financial systems are inherently fragile because of the very function which makes them valuable: liquidity … transformation. Regulatory reforms can strengthen the financial system and decrease the risk of liquidity crises, but they cannot … between monetary policy and liquidity transformation 'optimal' monetary policy would consist of a modified Taylor rule in …

liquidity effects. This paper discusses the basic frictions and mechanisms underlying this new class of models and investigates … long-lasting, quantitatively significant liquidity effects, as well as persistent increases in aggregate economic activity …