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Bank liquidity, stock market participation, and economic growth

Author

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  • MATTANA, Elena
  • PANETTI, Ettore

Abstract

We develop a growth model with banks and markets to reconcile the observed decreasing trend in the relative liquidity of many financial systems around the world with the increasing household participation in direct market trades. At low levels of economic development, the presence of fixed entry costs prevents the agents from accessing the market, and pushes them towards the banks, which provide high relative liquidity. We characterize the threshold after which the agents are rich enough to access the market, where the relative liquidity is lower, and show that the relative liquidity of the whole financial system (banks and markets) drops because of the increasing market participation. We provide some evidence consistent with this theoretical prediction: a one-unit increase in an index of securities market liberalization leads to a drop in the relative liquidity of between 17 and 27 per cent.
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Suggested Citation

  • MATTANA, Elena & PANETTI, Ettore, 2014. "Bank liquidity, stock market participation, and economic growth," LIDAM Reprints CORE 2639, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvrp:2639
    Note: In : Journal of Banking & Finance, 48, 292-306, 2014
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    10. Ardekani, Aref Mahdavi & Distinguin, Isabelle & Tarazi, Amine, 2020. "Do banks change their liquidity ratios based on network characteristics?," European Journal of Operational Research, Elsevier, vol. 285(2), pages 789-803.

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    More about this item

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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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