Bank Liquidity Creation and Real Economic Output
47 Pages Posted: 29 Oct 2014 Last revised: 19 Apr 2017
Date Written: January 17, 2017
We find that bank liquidity creation (LC) is statistically and economically significantly positively related to real economic output (GDP). This is robust to using instrumental variables and many robustness checks. LC also beats bank assets in “horse races.” On-balance sheet LC matters more for small banks and off-balance sheet LC matters more for large banks. Small bank LC generates more GDP per dollar than large bank LC, but large bank LC matters more overall because large banks provide much more LC than small banks. The LC-output relation is strongest in bank-dependent industries, consistent with the hypothesized transmission mechanism.
Keywords: Banks, Liquidity Creation, GDP, Economic Output
JEL Classification: G20, G21, O40, O43
Suggested Citation: Suggested Citation