Title: Bank Liquidity Holding and Creation
Abstract: "What are the determinants of bank liquidity holding? How does liquidity holding relate to money creation? I build a model of bank asset-liability management, focusing on liquidity holding. The bank faces deposit supply and loan demand shocks, which can be correlated. A higher correlation can be a sign that the bank has better ability to create money, that is to finance new loans by deposit creation. I show that the reserve ratio decreases in the correlation, and also increases in the variances of the shocks. In the real world, USA banks’ reserve ratios seem to decrease in the correlation and increase in the variance of deposit shocks indeed, but the variance of loan shocks seem to have an effect contrary to my theory."