Working Paper: CEPR ID: DP14956
Authors: Thorsten Beck; Robin Döttling; Thomas Lambert; Mathijs A. van Dijk
Abstract: Liquidity creation (the transformation of liquid liabilities into illiquid assets) is a key function of banks. We show that liquidity creation is positively associated with economic growth at both country and industry levels. In particular, liquidity creation helps growth by boosting tangible, but not intangible investment. Our results suggest an important non-linearity; liquidity creation does not contribute to growth in countries with a higher share of industries relying on intangible assets. We rationalize these results using a model in which banks increase aggregate investment by reducing liquidity risk, but low asset tangibility hampers liquidity creation by exacerbating moral hazard problems. Together, these findings provide new insights into the functions of banks, but also highlight their more limited role in supporting innovative industries.
Keywords: banking sector; development; economic growth; investment; liquidity creation; tangible assets
JEL Codes: E22; G21; O16; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| liquidity creation per capita (E29) | GDP per capita (O49) |
| liquidity creation (E51) | tangible investment (E22) |
| liquidity creation (E51) | intangible investment (E22) |
| liquidity creation (E51) | output in bank-dependent industries (G21) |
| liquidity creation (E51) | growth in countries with higher reliance on intangible assets (O39) |