The business cycle implications of banksʼ maturity transformation

This paper develops an RBC model where banks use short-term deposits to provide firms with long-term credit. The demand for long-term credit arises because firms borrow in order to finance their capital stock which they only adjust at infrequent intervals. We show that maturity transformation in the banking sector dampens the consumption and investment response to a technology shock. Our model also implies that the average deposit rate is less persistent than the average long-term loan rate, which we show is in line with corporate interest rate data in the US. ► We consider infrequent capital adjustments for firms. ► This introduces a demand for long-term credit into DSGE models. ► Banks use short-term deposit to provide firms with long-term credit. ► Thus, banks solve the classical maturity transformation problem.