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Liquidity Risk and Banks’ Asset Composition: Implications for Monetary Policy

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  • Edgar A. Ghossoub

    (The University of Texas at San Antonio)

Abstract

monstrate that in?ation adversely a¤ects capital formation through the crowding out e¤ect. Interestingly, the results are at odds with empirical evidence. In particular, recent studies point out to an asymmetric rela- tionship between in?ation and the real economy across countries. Speci?- cally, in?ation and output are negatively correlated in poor countries. In contrast, in?ation is associated with higher levels of economic activity in advanced economies. I present a monetary growth model where the ex- posure to risk is inversely related to the level of income. In this setting, I demonstrate that the e¤ects of monetary policy depend on the level of economic activity and the portfolio composition of ?nancial institutions. In poor countries, banks?portfolios consist primarily of government liabili- ties. Therefore, a higher rate of money creation inhibits capital formation in these economies. In contrast, banks devote more resources towards productive uses in advanced countries. Consequently, monetary policy generates a Tobin effect.

Suggested Citation

  • Edgar A. Ghossoub, 2009. "Liquidity Risk and Banks’ Asset Composition: Implications for Monetary Policy," Working Papers 0096, College of Business, University of Texas at San Antonio.
    • Handle: RePEc:tsa:wpaper:00124eco
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Economic Development; Banks; Monetary Policy;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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