DP17633 Canary in the Coal Mine: Bank Liquidity Shortages and Local Economic Activity
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.