We develop a new tractable model of banks' liquidity management and the credit channel of monetary policy. Banks … reserves. Deposit withdrawals are random, and banks manage liquidity risk by holding a precautionary buffer of reserves. We … greater liquidity risk. Through various tools, monetary policy affects the real economy by altering that trade-off. In a …

countries. This paper develops a two-country New Keynesian model { calibrated to represent a high- and a low-liquidity euro area …. These dampening effects are higher in the high-liquidity country. We find similar results in response to a monetary policy …