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

Rajkamal Iyer

No 17633, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: 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.

Keywords: Recessions; Banks; Deposit rates (search for similar items in EconPapers)
JEL-codes: E00 G20 (search for similar items in EconPapers)
Date: 2022-11
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