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Liquidity Creation, Investment, and Growth

Author

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  • Beck, Thorsten
  • Döttling, Robin
  • Lambert, Thomas
  • Van Dijk, Mathijs

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.

Suggested Citation

  • Beck, Thorsten & Döttling, Robin & Lambert, Thomas & Van Dijk, Mathijs, 2020. "Liquidity Creation, Investment, and Growth," CEPR Discussion Papers 14956, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14956
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    More about this item

    Keywords

    Banking sector development; Economic growth; investment; Liquidity creation; Tangible assets;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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