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Monetary Policy and Bank Liquidity Creation: Does Bank Size Matter?

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  • Hanh Song Thi Pham
  • Thanh Le
  • Loan Quynh Thi Nguyen

Abstract

This paper investigates the effect of monetary policy on liquidity creation of commercial banks and if the effect is conditional on bank size. The paper uses a dataset covering 23 Vietnamese commercial banks during the period 2007–2017 collected from various sources including State Bank of Vietnam, International Monetary Fund, SNL Financial database (provided by SNL Company), Vietnam General Statistic Office and banks’ annual reports. Different econometric techniques are employed to analyse the data. Obtained results indicate that a contractionary monetary policy could lead to a decrease in bank liquidity creation. This result is less pronounced with larger banks. In particular, among three monetary policy instruments employed in Vietnam, an increase in the base rate is significantly associated with a contraction in bank liquidity creation; open market operations may have a marginal impact while required reserve ratio is ineffective because of its unchanged value throughout the period of the study. This paper is among the first, providing an insight into each monetary policy instrument's role in influencing bank liquidity creation in the context of an emerging economy.

Suggested Citation

  • Hanh Song Thi Pham & Thanh Le & Loan Quynh Thi Nguyen, 2021. "Monetary Policy and Bank Liquidity Creation: Does Bank Size Matter?," International Economic Journal, Taylor & Francis Journals, vol. 35(2), pages 205-222, April.
    • Handle: RePEc:taf:intecj:v:35:y:2021:i:2:p:205-222
    DOI: 10.1080/10168737.2021.1901762
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    Cited by:

    1. Japan Huynh, 2023. "The monetary policy pass-through mechanism: Is the search-for-yield incentive at work?," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-12, December.
    2. Thomas Kick, 2022. "Interest rate shocks, competition and bank liquidity creation," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 36(4), pages 409-441, December.
    3. Gupta, Juhi & Kashiramka, Smita & Ly, Kim Cuong & Pham, Ha, 2023. "The interrelationship between bank capital and liquidity creation: A non-linear perspective from the Asia-Pacific region," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 793-820.

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