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 language | English |
|---|---|
| Pages (from-to) | 297-336 |
| Number of pages | 40 |
| Journal | Journal of Economic Growth |
| Volume | 28 |
| Issue number | 2 |
| DOIs | |
| Publication status | Published - 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).
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How banks affect investment and growth: New evidence
Dottling, R., Lambert, T. & van Dijk, M.
2/07/20
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