Economic Policy Uncertainty and Bank Liquidity Creation
45 Pages Posted: 6 Sep 2017 Last revised: 10 Nov 2017
Date Written: November 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 EPU decreases asset-side and off-balance sheet-side bank liquidity creation, but increases liability-side liquidity creation by a lesser amount, yielding reduced total liquidity creation. Thus, EPU likely harms the economy as it hampers banks’ abilities to perform their key function of intermediating liquid funds for productive purposes. Results hold across bank size classes, but are weaker during financial crises, possibly because of favorable government treatment during crises shielding them from uncertainty.
Keywords: economic policy uncertainty, bank, liquidity creation, economic growth
JEL Classification: G21, G18, P16
Suggested Citation: Suggested Citation