Consider the model of banks and inside money. The interest rate paid by commercial banks on deposits D is im, and commercial banks make loans L 2 at interest rate il . There is an interbank market where commercial banks can borrow reserves from each other at interest rate i. The aggregate supply of reserves R is determined by the central bank. There are standing facilities at the central bank to pay interest on reserves at rate id, and to make loans at interest rate ib if banks face a shortage of reserves. There are no reserve