Citation

Discussion Paper Details

Please find the details for DP14956 in an easy to copy and paste format below:

Full Details | Bibliographic Reference

Full Details

Title: Liquidity Creation, Investment, and Growth

Author(s): Thorsten Beck, Robin D�ttling, Thomas Lambert and Mathijs A Van Dijk

Publication Date: June 2020

Keyword(s): Banking sector development, economic growth, investment, liquidity creation and tangible assets

Programme Area(s): Financial Economics

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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14956

Bibliographic Reference

Beck, T, D�ttling, R, Lambert, T and Van Dijk, M. 2020. 'Liquidity Creation, Investment, and Growth'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14956