Monetary Policy and Bank Liquidity Creation: A Multivariate Markov Switching Approach

Mustafa Caglayan (m.caglayan@hw.ac.uk) and Kostas Mouratidis

No 2022003, Working Papers from The University of Sheffield, Department of Economics

Abstract: Despite its importance, there is little empirical research on how monetary policy affects bank-liquidity creation. We propose a general Markov switching framework to examine the effects of monetary policy on liquidity creation while accounting for endogenous regime switches and capturing the idea that financial crises could be due to a regime switch from information-insensitive debt to information-sensitive debt. Using total liquidity creation and its components for different bank-size categories, we show that monetary policy has a regime dependent impact. Furthermore, based on the filter probabilities, our analysis also raises the possibility of a future financial turmoil.

Keywords: Liquidity creation; bank size; monetary policy; policy trade-off; asymmetric effects; Markov switching (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2022-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:shf:wpaper:2022003

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