Bank Liquidity Creation, Monetary Policy, And Financial Crises

The efficacy of monetary policy depends largely on how it affects bank behavior. Recent events have cast doubt on how well monetary policy works in this respect, particularly during financial crises. In addition, issues have been raised about the role of banks in creating asset bubbles that burst and lead to crises. In this paper, the authors address these issues by focusing on bank liquidity creation, which is a comprehensive measure of bank output that accounts for all on- and off-balance sheet activities.