Most analyses of banking crises assume that banks use real contracts. However, in practice, contracts are nominal and this is what is assumed here. We consider a standard banking model with aggregate return risk, aggregate liquidity risk and idiosyncratic liquidity shocks. We show that, with...

We present a model of banks' liquidity management where banks choose a portfolio of liquid and illiquid assets, and later on decide to lend or hoard liquidity. Ex ante, banks choose whether to be "liquid", by holding both liquid and illiquid assets, or "illiquid", by holding only illiquid...

Banks hold liquid and illiquid assets. An illiquid bank that receives a liquidity shock sells assets to liquid banks in exchange for cash. We characterize the constrained efficient allocation as the solution to a planner's problem and show that the market equilibrium is constrained inefficient,...