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Bank liquidity creation and recessions

Ujjal K. Chatterjee

Journal of Banking & Finance, 2018, vol. 90, issue C, 64-75

Abstract: We investigate the relationship between bank liquidity creation and recessions in the U.S. For the 1984–2010 sample, we find that (i) lower bank on-balance sheet liquidity creation signals recessions four quarters into the future; (ii) off-balance sheet liquidity creation is not a robust predictor of recessions at longer forecast horizons; (iii) off-balance sheet liquidity creation falls in tandem with on-balance sheet liquidity creation one quarter prior to recessions, and aggregate, on- and off-balance sheet bank liquidity creation continue to decline during and up to five quarters after recessions; and (iv) liquidity creation of larger banks contains more information about future recessions than that of smaller ones.

Keywords: Treasury yield curve; Bank liquidity creation; Recessions; Financial stability; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E43 E47 E52 E58 G17 G18 G21 O40 O43 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:jbfina:v:90:y:2018:i:c:p:64-75