Introducing shadow banks into the economy lowers the money supply measured as the sum of cash and deposits, while the amount of payment liquidity does not decrease as long as the liabilities of shadow banks remain fully liquid. At the same time, the total amount of credit available to firms...

We study the interactions between the two roles of commercial banks as payment intermediaries and credit intermediaries. Deposits serve as a medium of exchange, and depositors with liquidity shocks may pay with deposits for real consumptions without withdrawing cash from the banking system....

We introduce banks to the fiscal theory of price level to study the effectiveness of open market operations in correcting the distortions caused by an improper tax rate. A rise in the tax rate increases the real purchasing power of payment liquidity for short-term consumption, but reduces firms'...

We introduce banks to the fiscal theory of price level to study the effectiveness of open market operations in correcting the distortions caused by an improper taxrate. A rise in the tax rate increases the real purchasing power of payment liquidity for short-term consumption, but reduces...

Real liquidity refers to the real purchasing power of the monetary base. In an economy where banks only take money as deposits, insufficient real liquidity constrains the price level when there is a liquidity shock before banks settle their long-term loan contracts. This leads to strictly...

Interconnected banks are prone to the propagation of negative shocks. In a network with banks borrowing from each other using collateral, the risk of financial contagion leads to the emergence of multiple equilibria, featuring different sizes of loans and collateral haircuts. Safe assets are...