Abstract
Abstract We find that bank liquidity creation ( LC ) is statistically and economically significantly positively related to real economic output ( GDP ). This is robust to using instrumental variables and many robustness checks. LC also beats bank assets in “horse races.” On-balance sheet LC matters more for small banks and off-balance sheet LC matters more for large banks. Small bank LC generates more GDP per dollar than large bank LC , but large bank LC matters more overall because large banks provide much more LC than small banks. The LC -output relation is strongest in bank-dependent industries, consistent with the hypothesized transmission mechanism.
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