Economic Policy Uncertainty and Bank Liquidity Creation
52 Pages Posted: 6 Sep 2017 Last revised: 15 Feb 2018
Date Written: February 2018
We identify an important channel through which economic policy uncertainty (EPU) affects the real economy – bank liquidity creation. Using over one million U.S. bank-quarter observations during 1985:Q2-2016:Q4, we find EPU decreases asset-side and off-balance sheet-side liquidity creation, but increases liability-side liquidity creation by less, yielding reduced total liquidity creation. The reductions stem primarily from decreased supply of banking services, rather than demand, suggesting the negative effects of EPU on bank liquidity creation have causal effects in harming the real economy. Findings are highly robust, except for during financial crises, possibly reflecting favorable government treatment of banks during these times.
Keywords: economic policy uncertainty, bank, liquidity creation, economic growth
JEL Classification: G21, G18, P16
Suggested Citation: Suggested Citation