Liquidity Creation, Investment, and Growth

Thorsten Beck, Döttling, Robin, Thomas Lambert and Mathijs Van Dijk
Authors registered in the RePEc Author Service: Robin Döttling

No 14956, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Banking sector development; Economic growth; investment; Liquidity creation; Tangible assets (search for similar items in EconPapers)
JEL-codes: E22 G21 O16 O40 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-gro and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Liquidity creation, investment, and growth (2023)
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