The Liquidity Constraint of Banks and Monetary Non-Neutrality in the Steady State

This paper shows that monetary policy produces real effects in the steady state by impacting banks' liquidity constraint, in the absence of frictions that have been used to generate non-neutrality, such as nominal rigidity and search frictions. Moreover, the effects for different types of banks are different, even opposite. Each bank sees a fraction of money that it lends out circulates into other banks and this fraction defines the bank's type. The greater the outflow fraction, the tighter the liquidity constraint. Lastly, if technological advancement eliminates depositor withdrawals, fiat money will stop circulating and a bullion standard might return.