Finance: Research, Policy and Anecdotes

Liquidity creation and growth – now forthcoming in JEG

There was a time when I did not think I would write another finance and growth paper (maybe except for literature surveys), but write I did and now it is even being published 😊. In joint work with Robin Doettling, Thomas Lambert and Mathijs van Dijk, now accepted and forthcoming in the Journal of Economic Growth (where many years ago I published my co-authored paper on Finance, Inequality and the Poor), we show that liquidity creation by banks (intermediation of liquid liabilities into illiquid assets) ispositively associated with economic growth at country and industry levels. However, liquidity creation booststangible, but not intangible investment and does not contribute to growth in countries with a high shareof industries reliant on intangible assets.  This points to an important non-linearity in the finance-growth relationship but also to the optimal financial structure (mix of banks, non-bank financial intermediaries and capital markets) changing with the economic structure of a country.  And taking these results to the current financial structure in Europe, it points again to the need to strengthen non-bank financial intermediaries and the capital market union as financing modes for intangible assets, which are becoming more and more important.  And as a reviewer pointed out during the review process, it also makes the case for bank bailouts somewhat less obvious if real economy funding relies less on banks.