Banks, money and the zero lower bound

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 24 August 2018

Staff Working Paper No. 752

By Michael Kumhof and Xuan Wang

We study a New Keynesian model where banks create deposits through loans, subject to increasing marginal cost of lending. Banks do not intermediate commodity deposits between savers and borrowers, instead they offer a payment system that intermediates ledger-entry deposits between different spenders. We discuss three implications. First, non-banks’ aggregate purchasing power consists not only of their income but also of new loans/deposits. Second, near the ZLB policy rate reductions compress spreads, and thereby reduce bank profitability, deposit creation and output. Third, near the ZLB Phillips curves are flatter, because lower factor cost inflation is partly offset by inflationary credit rationing.

PDFBanks, money and the zero lower bound

 

 

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