Saturday, 22 October 2011: 4:15 PM
This paper develops a simple dynamic model of banking, based on the empirical evidence on the demand for money and the liquidity creation process. The model provides a possible explanation of the empirical evidence that commercial and industrial lending rises following tighter monetary policy. The bank of the model, in fact, smoothes interest rates shocks, while it does not provide insurance against negative shocks of real origin. Finally, very low level of market interest rates push the bank to substitute deposits with market sources of finance.