42 Pages Posted: 6 Sep 2017 Last revised: 16 Sep 2017
Date Written: August 31, 2017
We investigate an important channel through which economic policy uncertainty (EPU) affects the economy – bank liquidity creation. Using over one million U.S. bank-quarter observations from 1985:Q2 to 2016:Q4, we find that EPU decreases total, asset-side, and off-balance sheet-side bank liquidity creation, partially offset by increased liability-side liquidity creation. Findings suggest EPU likely harms the economy as it results in more funds flowing into the banking system, but fewer flowing out for productive purposes. Results hold across bank size classes, but are somewhat weaker during financial crises, possibly because of favorable government treatment during crises that helps shield them from uncertainty.
Keywords: economic policy uncertainty, bank, liquidity creation, economic growth
JEL Classification: G21, G18, P16
Suggested Citation: Suggested Citation
Berger, Allen N. and Guedhami, Omrane and Kim, Hugh Hoikwang and Li, Xinming, Economic Policy Uncertainty and Bank Liquidity Creation (August 31, 2017). Available at SSRN: https://ssrn.com/abstract=3030489