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Is too much liquidity harmful to economic growth?

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  • Chu, Lan Khanh
  • Chu, Hung Viet

Abstract

This paper studies the relationship between financial liquidity and economic growth. Using a panel data of 136 countries, we find that there exists a threshold, above which the marginal effect of financial liquidity on economic growth changes from positive to negative. In particular, the turning points for which domestic credit to private sector and stock market turnover start having negative effects on growth are 104% GDP and 107% respectively. Moreover, although the thresholds in middle- and low-income countries are higher than those in high-income countries, the growth-enhancing effect of financial liquidity is stronger in high-income countries. Our results are robust to income level groups, alternative model specifications, proxies for financial liquidity, and not driven by banking crises or stock market crashes.

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  • Chu, Lan Khanh & Chu, Hung Viet, 2020. "Is too much liquidity harmful to economic growth?," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 230-242.
    • Handle: RePEc:eee:quaeco:v:76:y:2020:i:c:p:230-242
    DOI: 10.1016/j.qref.2019.07.002
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    More about this item

    Keywords

    Financial liquidity; Economic growth; Non-linearity;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G2 - Financial Economics - - Financial Institutions and Services
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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