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 …

to banks and in absolute terms. The nonbank credit expansion is driven by long-term debt funding flowing to nonbanks. The …