What Are The Channels Through Which Bank Liquidity Creation Affects GDP? Evidence From an Emerging Country

Abstract

Gross domestic product (GDP) depends on myriad factor and financial intermediaries especially banks play a very important role in economic growth and development of a country. They not only lend loans rather also generate liquidity—which is very important for the smooth functioning of an economy. Therefore, this study explores the channels through which bank liquidity creation affects GDP. It uses the data from listed and unlisted Chinese banks ranging from the year 2006 to 2017. The results of the analysis reveal that the liquidity creation by Chinese banks significantly negatively affects economic output. The magnitude of the impact of small-bank liquidity creation is greater than the large banks. Variation in the GDP is explained by current and previous year’s liquidity creation. Cat-fat measure of liquidity creation affects GDP directly as well as through consumption, investment, government expenditure, and net exports channels; however, cat-nonfat measure affects economic output directly and through all aforementioned channels except net exports. Overall, the findings support the hypothesis that liquidity creation affects the economy directly as well as through different channels.

Impact of banking subsystem liquidity creation on real economic output

“…However, Almeshari et al (2023) have reported a nonlinear relationship between liquidity creation and economic growth in a sample of 10 MENA countries. Finally, Umar et al (2021) found a negative relationship between liquidity creation and economic output in the case of China.…”

“…All variables are winsorized to reduce the influence of outliers. Meanwhile, all of the independent variables are lagged with one year to Banking subsystem liquidity creation further mitigate any potential issues of endogeneity (Kendo and Tchakounte, 2022;Umar et al, 2021).…”

“…Chatterjee (2018) argued that while measuring bank liquidity creation is crucial, examining the impact of liquidity creation on economic growth is also equally important to evaluate the efficacy of monetary policy. Surprisingly, the impact of bank liquidity creation on real output has only been investigated in the context of economies with monolithic banking system and the findings are mixed with positive impact on real output (Beck et al , 2023; Berger and Sedunov, 2017; Chatterjee, 2018; Fidrmuc et al , 2015), negative impact on real output (Umar et al , 2021) and non-linear impact on economic growth over the short-run and long-run in 10 MENA countries (Almeshari et al , 2023). Our study builds on this limited strand of literature and extends it with new evidence from Muslim-majority countries with dual banking system and tri-banking system.…”

Liquidity Creation and its Impact on Economic Growth: Moderating Role of Firm Size

“…Their research indicated that LC promoted tangible investment, while intangible investment did not significantly contribute to the development of economies that rely on intangible assets. However, Umar et al (2021) discovered a negative correlation between LC and China's economic output based on the data gathered from 377 banks from 2006-2017.…”

Derivation of Sago Processed Food in Yupaet MSMEs

“…Meanwhile, the contribution of Sago exports seen in 2019 was 47.52 billion Rupiah and the total volume was 13,892 tons (kontan.co.id, 2022). From data on the contribution of the Sago plant, it can be seen that Sago has the opportunity to become a national food force, and optimizing the use of Sago can improve the people's economy (Umar et al, 2021). However, the facts that occur on the ground are that the main food for Indonesian people is rice and wheat.…”