Given these household preferences, the name of the game for financial intermediaries is to create as much in the way of safe money-like claims from each asset category i as possible. And given the structure of the model, there are two distinct technologies for creating safe claims. The first technology we label “traditional banking.” A traditional bank is relatively conservative in issuing safe claims.
If consumers or firms face low real rates and easy credit during the booms caused by favorable terms of trade and inflows, they will naturally recycle those gains into consumer demand and into risky forms of investment and not into more sustainable savings and investments. IV.