Liquidity creation, investment, and growth

Thorsten Beck, Robin Döttling, Thomas Lambert*, Mathijs van Dijk

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

5 Citations (Scopus)

Abstract

Using panel analysis for a large cross-section of countries, we find that liquidity creation by banks is positively associated with economic growth at country and industry levels. Liquidity creation boosts tangible, but not intangible investment and does not contribute to growth in countries with a high share of industries reliant on intangible assets. These findings are consistent with a theoretical model in which liquidity creation fosters investment only if it is sufficiently tangible. Our results shed light on important heterogeneities in the role of banks in the economic development process and their limited role in countries’ transition to knowledge economies.

Original languageEnglish
Pages (from-to)297-336
Number of pages40
JournalJournal of Economic Growth
Volume28
Issue number2
DOIs
Publication statusPublished - Jun 2023

Bibliographical note

Funding Information:
Under this contract, the bank holds a mix of illiquid assets (loans) and liquid assets (cash), funded by short-term, liquid deposits. Investors are no longer exposed to liquidity risk because they finance the long-term investment with a long-term loan, while also holding demand deposits that allow them to consume early if desired without liquidating the long-term asset. That is, banks create liquidity.

Publisher Copyright:
© 2022, The Author(s).

Fingerprint

Dive into the research topics of 'Liquidity creation, investment, and growth'. Together they form a unique fingerprint.

Cite this