Altermatt, Lukas; Buggenum, Hugo van; Voellmy, Lukas - 2024
We introduce banks that issue liquid deposits backed by bonds and capital into an otherwise standard cash …-in-advance economy. Liquidity transformation by banks increases aggregate consumption and investment relative to a cash-only economy but … 'liquidity trap', in which nominal bond rates equal zero and banks are indifferent between holding bonds and reserves. Whether …