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Paradox of Excess Liquidity in European Emerging and Transition Economies

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  • Albulenë Kastrati

Abstract

European emerging and transition economies are in immense need of investments and renewal of capital, yet they produce a considerable amount of unutilized resources. In particular, banks hold excess liquidity in the face of seemingly profitable lending opportunities. Is it a demand-side or supply-side problem or is this region entirely different and have we been working under the wrong paradigm? This study creates a new estimate of excess liquidity by taking into account banks' overall liquidity position. Breaking down precautionary from involuntary excess liquidity, a significant presence of the latter is evident. A part of the story deals with insensitivity of deposits to interest rates. Based on our standard understanding of how banks work, this is puzzling and this study creates a new way to look at this. Using new measures is the way to launch the investigation of causes and policy implications for involuntary excess liquidity.

Suggested Citation

  • Albulenë Kastrati, 2022. "Paradox of Excess Liquidity in European Emerging and Transition Economies," Prague Economic Papers, Prague University of Economics and Business, vol. 2022(1), pages 79-114.
    • Handle: RePEc:prg:jnlpep:v:2022:y:2022:i:1:id:793:p:79-114
    DOI: 10.18267/j.pep.793
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    More about this item

    Keywords

    Excess liquidity; emerging economies; banks; European countries;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D60 - Microeconomics - - Welfare Economics - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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