Is Too Much Liquidity Harmful to Economic Growth?

23 Pages Posted: 27 Mar 2019

See all articles by Lan Chu Khanh

Lan Chu Khanh

State Bank of Vietnam - Banking Academy of Vietnam

Hung Chu

Washington and Lee University

Date Written: February 13, 2019

Abstract

This paper provides evidence on the relationship between financial liquidity and economic growth. Using a panel data of 136 countries, we find that there exists a threshold above which the marginal effect of financial liquidity on economic growth becomes negative. In particular, the turning points for which domestic credit to private sector and stock market turnover start having negative effect on growth are 104% GDP and 105% respectively. Our results are robust to country income level groups, alternative model specifications, proxies for financial liquidity, and are not driven by macroeconomic volatility, banking crises, stock market crashes.

Keywords: financial liquidity, economic growth, non-linearity

JEL Classification: E44, G2, O1

Suggested Citation

Chu Khanh, Lan and Chu, Hung, Is Too Much Liquidity Harmful to Economic Growth? (February 13, 2019). Available at SSRN: https://ssrn.com/abstract=3333637 or http://dx.doi.org/10.2139/ssrn.3333637

Lan Chu Khanh (Contact Author)

State Bank of Vietnam - Banking Academy of Vietnam ( email )

No.12, Chuaboc Street
Hanoi, Hanoi 10000
Vietnam
+84948788789 (Phone)

Hung Chu

Washington and Lee University ( email )

204 W Washington St
Lexington, VA 24450
United States
540-319-0981 (Phone)

HOME PAGE: http://hungvietchu.com

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