Money creation process, banking performance and economic policy uncertainty: evidence from Tunisian listed banks

Abstract

PurposeThis paper aims to investigate the relationship between money creation process and banking performance for Tunisian listed banks, particularly in the context of increased economic policy uncertainty.Design/methodology/approachIn the relevant literature, there are two theories of money creation. The theory of money creation out of nothing, by using the central bank for refinancing and the theory of financial intermediation, from which money creation is made from preexisting savings. In this paper, the authors utilize a panel data for a sample composed of 11 Tunisian banks during the period of study from 1999 to 2019.FindingsThe study’s empirical analysis show that both forms of money creation have a positive impact on bank profitability as measured by the return on assets (ROA) and return on equity (ROE) ratios. However, the same analysis shows that the channel of money creation out of nothing is the most profitable for banks. Also, the authors show that economic policy uncertainty negatively influences the relationship between money creation and banking profitability only when credit creation is derived from savings.Originality/valueThis paper contributes to the literature by explaining the nexus between money creation and Tunisian banking performance which depends on the implementation of stable and conducive economic and political environment. Also, this link requires the implementation of monetary measures to encourage savings and develop an efficient capital market and judicious monetary policy enabling the central bank to inject more liquidity into the economy.