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The effects of economic policy uncertainty and country governance on banks' liquidity creation: International evidence

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  • Wang, Chih-Wei
  • Lee, Chien-Chiang
  • Chen, Ming-Chien

Abstract

This study empirically investigates the effects of economic policy uncertainty (EPU) and country governance on bank liquidity creation in various countries. Using the cross-country bank data, we find that EPU harms asset-side liquidity creation and benefits liability-side liquidity creation. The results reveal that uncertainty hinders bank credit, and people tend to make deposits in banks for safety. Moreover, country governance mitigates the negative impact of EPU on bank liquidity creation. Our results are robust in the subsample, two-stage least squares regression, and generalized method of moments analyses. Overall, our findings have crucial policy implications for policy makers and bankers.

Suggested Citation

  • Wang, Chih-Wei & Lee, Chien-Chiang & Chen, Ming-Chien, 2022. "The effects of economic policy uncertainty and country governance on banks' liquidity creation: International evidence," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:pacfin:v:71:y:2022:i:c:s0927538x22000038
    DOI: 10.1016/j.pacfin.2022.101708
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    More about this item

    Keywords

    Bank liquidity creation; Economic policy uncertainty; Country governance;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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