A more realistic assumption would be that by investing the good at T=0, it cannot be paid out and consumed at T=1. This is only possible at T=2. With this assumption, the model has two different assets:
– a liquid asset, i.e. the all-purpose asset has not been invested in T=0 and it can be consumed at T=1,
– an illiquid asset, i.e. the all-purpose asset been invested in T=0 and can only be consumed at T=2.
Without banks, risk-averse agents would not be able to participate in the returns of the investment good. As they all are confronted with the risk of being type 1, it would be very risky to invest the commodity. In T=1, Type 1 agents would then not be able to consume.
In such a model, banks can provide an obvious improvement if one assumes again that they know the share of type 1 and type 2 agents. In T=0, all agents deposit their endowment of the commodity with the bank. Assuming that the share of type 1 agents is 25 %, the bank keeps 25 % of the all-purpose asset unchanged and invests 75 % as illiquid long-term investment. It thus performs maturity transformation by transforming liquid assets into illiquid assets (Figure 2).
Author(s): Peter Bofinger and Thomas Haas
Publication Date: 18 Oct 2022
Publication Site: Institute for New Economic Thinking