IDEAS home Printed from https://ideas.repec.org/p/snb/snbwpa/2025-04.html
   My bibliography  Save this paper

Money creation in a neoclassical economy: equilibrium multiplicity and the liquidity trap

Author

Listed:
  • Lukas Altermatt
  • Hugo van Buggenum
  • Lukas Voellmy

Abstract

We introduce banks that issue liquid deposits backed by illiquid bonds and capital into an otherwise standard cash-in-advance economy. Liquidity transformation can lead to multiple steady-state equilibria with different interest rates and real outcomes. Whenever multiple equilibria exist, one of them is a 'liquidity trap', in which nominal bond rates equal zero and banks are indifferent between holding bonds or reserves. Whether economic activity is higher in a liquidity trap or in a (coexisting) equilibrium with positive interest rates is ambiguous, but the liquidity trap equilibrium is more likely to go in hand with inefficient overinvestment. While liquidity transformation can lead to macroeconomic instability in the form of multiple equilibria, aggregate consumption is higher than in a cash-only economy, regardless of which equilibrium is selected.

Suggested Citation

  • Lukas Altermatt & Hugo van Buggenum & Lukas Voellmy, 2025. "Money creation in a neoclassical economy: equilibrium multiplicity and the liquidity trap," Working Papers 2025-04, Swiss National Bank.
    • Handle: RePEc:snb:snbwpa:2025-04
    as

    Download full text from publisher

    File URL: https://www.snb.ch/en/publications/research/working-papers/2025/working_paper_2025_04
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    Banks; Liquidity; Monetary policy; Zero-lower bound;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:snb:snbwpa:2025-04. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Enzo Rossi (email available below). General contact details of provider: https://edirc.repec.org/data/snbgvch.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.