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

Listed author(s):
  • Edgar A. Ghossoub

    (The University of Texas at San Antonio)

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    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.

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    Paper provided by College of Business, University of Texas at San Antonio in its series Working Papers with number 0096.

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    Length: 25 pages
    Date of creation:
    Handle: RePEc:tsa:wpaper:0096
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