Working Paper: CEPR ID: DP17633
Authors: Rajkamal Iyer; Shohini Kundu; Nikos Paltalidis
Abstract: This paper investigates the relation between bank liquidity and local economic activity. We find that an increase in deposit rates offered by banks within a geographic region is associ- ated with contractions in economic activity. As a region heads to an economic downturn, deposit growth slows down, prompting banks to increase deposit rates to support their balance sheet. This increase in deposit rates reflects the liquidity squeeze experienced by banks due to deteriorating economic conditions, which in turn serves as an indicator of an impending economic contraction.
Keywords: recessions; banks; deposit rates
JEL Codes: E00; G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Liquidity shortages (E51) | Increase in deposit rates (E43) |
| Liquidity shortages (E51) | Lower GDP growth (F62) |
| Liquidity shortages (E51) | Reduced firm creation (L26) |
| Liquidity shortages (E51) | Higher loan delinquencies (G51) |
| Increase in deposit rates (E43) | Declines in deposit growth (O16) |
| Increase in deposit rates (E43) | Contractions in economic activity (E32) |