Economic Policy Uncertainty and Bank Liquidity Creation
60 Pages Posted: 6 Sep 2017 Last revised: 6 May 2018
Date Written: April 1, 2018
Using over one million bank-quarter observations, we identify an important channel through which economic policy uncertainty (EPU) harms the real economy – bank liquidity creation. EPU decreases asset-side and off-balance sheet-side liquidity creation, but increases liability-side liquidity creation by less, yielding reduced total liquidity creation. Reductions stem primarily from decreased liquidity supply, rather than demand, suggesting causal effects on the real economy. This channel may help explain prior findings of unfavorable effects of uncertainty on corporate and household behavior. Stock market analysis reinforces our results. Findings do not hold during financial crises, possibly reflecting favorable government treatment of banks during crises.
Keywords: economic policy uncertainty, bank, liquidity creation, economic growth
JEL Classification: G21, G18, P16
Suggested Citation: Suggested Citation