Liquid Liabilities Research Articles

Financial Development and Private Investment

This paper finds that financial sector growth is key to boosting private investment in Pakistan. Banks, as financial intermediaries, enhance private investment by lowering risks and supporting decision-making through strong accounting standards. A broader financial system—measured by the ratio of commercial bank assets—positively impacts private investment. Financial deepening, or increasing liquid liabilities, also plays a critical role, as a developed banking system reduces transaction costs and improves fund access. Increasing private sector credit drives investment, so aligning the credit system with Pakistan's investment needs is essential. Strengthening financial intermediaries, enforcing contracts, and managing risks are necessary steps to support Pakistan’s financial sector growth and stimulate investment.

Financial Development and Income Inequality: Evidence from Latin America, 2001-2021

Numerous studies delve into the theoretical frameworks on finance and inequality. However, there are too few empirical tests on its theoretical relations due to a lack of data to capture financial development. Additionally, due to the many social and economic dimensions of a large economy such as Brazil or Argentina, it is unrealistic to consider that labor market or political issues are the only culprits of income inequality. More research is needed to understand the dynamics of inequality. In this paper, we evaluate the influence of financial development on income inequality using nineteen countries in Latin America from 2001 to 2021. Two indicators of financial development are employed. First, I use the broader definition of money, M3, as a percentage of GDP to capture the liquid liabilities because M1 or M2 may be a poor proxy in economies with weak financial systems. Secondly, the ratio of credit to private sector to GDP is employed because financial intermediaries with higher volumes of credit are more involved in financial development, such as diversifying risk, saving mobilization, facilitating transactions, allocating funding to economic activities, and monitoring borrowers’ activities. Based on the GMM estimator, our empirical findings support that better-developed financial markets reduce inequality.

The Influence of the Banking Sector on Economic Growth and Commodity Prices: A Panel Data Analysis of Spain, France, and Romania

This study aims to investigate the impact of the banking sector on economic growth and commodity prices. Through panel data analysis, the research explores the relationship between the banking sector and economic growth in Spain, France, and Romania from 2000 to 2020. The findings reveal a positive correlation between the strength of the banking sector and economic growth across these nations, underscoring its pivotal role in fostering economic expansion and subsequently improving commodity prices. Additionally, this study evaluates various regulatory measures crucial ensuring the banking sector’s sustainability and preventing financial crises, including credit risk management, lending policies, liquidity constraints, and international financing and investment strategies. By analyzing the interplay between regulatory measures and banking sector performance, incorporating variables such as non-performing loans, household debt, liquid liabilities, government consumption expenditure, foreign investments, and trade openness, this research provides policymakers with valuable insights to formulate effective strategies for promoting economic stability and ensuring the sustainability and growth of the banking sector.

The relationship between financial sector development and individual economic well-being in Mena region: Panel feasible generalized least squares between 2005 and 2022

This research explores the nexus between financial sector development and individual economic well-being in 29 countries in the MENA region using panel data models over the period 2005-2022, based on the R programming language. The key financial variables considered are bank branches per 100,000 adults (AI), liquid liabilities (OI), deposit assets (DI), stock market capitalization (DM), and market capitalization of listed national companies (CM). Furthermore, the study employs 9 panel data models to examine the interaction; these models include Pooled OLS, Fixed Effects models (with individual, time, and two-way effects) using different approaches (within and between), and Random Effects models. Specification tests suggest the importance of accounting for fixed effects and addressing heteroskedasticity in the analysis. To enhance the analysis, 3-Panel Feasible Generalized Least Squares models were adopted to address challenges encountered by the model. The PFGLS First-Difference individual effect model demonstrated higher explanatory power and statistical significance of coefficients explaining 97% of the data’s variability compared to the PFGLS Individual and Time Fixed Effects models, providing a more reliable framework for understanding the connection between financial indicators and individual economic well-being. The findings conclude the significant influence of financial fluctuations on the dynamics of individual economic well-being. It proposes that policymakers have to focus on promoting financial sector development to achieve sustainable economic growth and improve individual economic well-being.

Remittance inflows and financial development in Sub-Saharan African countries: Does governance matter?

BackgroundThe surge in remittances in most sub-Saharan African countries motivated this study to establish whether remittance inflows enhance financial development and whether governance plays any significant mediating role in the nexus between financial development and remittance inflows. PurposeThe study examines the impact of remittance inflows on bank-based financial development in 26 sub-Saharan African (SSA) countries using three proxies of bank-based financial development. The study also examines whether government regulatory quality and effectiveness modulate the impact of remittance on bank-based financial development. MethodThe generalised method of moments (GMM) estimation technique is used to examine this linkage. ResultsThe results show that when financial development is proxied by liquid liabilities and bank deposits, remittance inflow is found to have an unconditional positive impact on bank-based financial development, while governance is found to reinforce the positive relationship between remittance and financial development. However, when financial development is proxied by deposit money bank assets, remittance is found to have no profound effect on bank-based financial development, but it was found to interact with government effectiveness to yield a positive influence on financial development. ConclusionOverall, remittance inflows were found to have an overwhelming positive impact on the banking sector development. It was also found that good governance generally tends to reinforce the positive impact of remittances on banking sector development. NoveltyThis study adds value to the extant literature by providing answers to the role that governance plays in enhancing the impact of remittances on financial development in sub-Saharan African countries.

Financial Development and Real Sector Growth: An Empirical Investigation of Nigerian Economy (1970-2022)

The implementation of several banking sector reforms in Nigeria were undertaken to enhance accessibility of finance to especially, the real sector of the Nigerian Economy, but surprisingly the sector is still bedevilled with inadequate access to finance especially from the deposit money banks that warehoused about 90% of the total financial sector assets. High nominal interest rate is the major cause for many firms to avoid bank-borrowing. These myriad financing challenges facing the real sector calls for the assessment of finance-growth nexus in Nigeria. In this regard, this study examines the long run relationship between selected financial development indicators and real sector growth in Nigeria over the period 1970-2022. Based on the nature of the study, correlational research design was adopted while secondary data source was mainly employed. Johansen and Juselius’ (1990) approach to cointegration and Vector’s Error Correction Modelling (VECM) was used to determine the extent of the relationship between the variables. The findings of the study revealed that in the short-run, liquid liabilities of deposit money banks, trade openness and credit to the private sector exert statistically significant influence on the real sector of Nigerian Economy while in the long-run, liquid liabilities of deposit money banks, trade openness, credit to the private sector, interest rate spread and government expenditure exert statistically significant influence on the real sector of Nigerian Economy. Conclusively, the study affirmed that the Mckinnon and Shaw (1973) theory of Financial Liberalisation can explain the paucity of funding to the real sector of the Nigerian economy. The policy implications of the study are; financial reforms should focus providing low-cost credit and liberalising the interest rate. Also, government and deposit money banks should direct their on-lending activities and credit facilities towards encouraging and financing entrepreneurs to increase investment and in turn real sector growth.

Еволюція ролі та функцій комерційних банків в економічній системі: теоретико-історичний підхід

The aim of the article is to deepen and develop the scientific foundations of the evolution of the functions and role of commercial banks in the economic system through the transformation of the essence of banking activities and the emergence of new financial instruments in historical retrospective. The article summarizes scientific approaches to describing the evolution of the functions of commercial banks in historical retrospective; the essence of the transformation of banking activity due to growing risks and competition in financial markets is disclosed; an extended list of functions of commercial banks in today’s conditions is provided; the dynamics of the number of commercial banks in the leading countries of the world and countries with emerging markets is analyzed; tendencies and prospects for the development of banking and functions of commercial banks in the context of globalization of the economy and the introduction of novel digital financial instruments are substantiated. A functional analysis of the role and importance of commercial banks in the economic system for the period from the 16th century AD to the present is carried out. It is emphasized that in modern conditions banks are turning into institutions for servicing speculative flows. At the same time, the main function of commercial banks – lending to the real sector of the economy – begins to fade into the background due to low profitability. The essence of banking activity and features of new functions of banks over the past 25 years are disclosed. It is emphasized that computerization and financial innovations have significantly changed the ways of functioning of commercial banks. These processes made it possible to introduce new forms of service and types of banking products, improve bank management, collect and process large amounts of statistical information, and expand the scope of activities of large banks beyond national borders. It is proved that the timeliness and continuity of saturation of the economy with monetary resources is influenced not only by the number of commercial banks, but also by the mechanism for ensuring solvency and effective redistribution of cash flows between owners of funds and recipients of credit resources – both individual banks and the banking system as a whole. Proposals on the role and importance of commercial banks for the economy, based on their ability to increase the efficiency of the functioning of the economic system, have been substantiated. The essence of the transformation function of banks is that, transforming the space, size, terms, risks, illiquid assets into liquid liabilities, liquidity, purchasing power, information, banks play an important role in the State, as it allows to reduce risks in the economic system and social costs. Prospect for further research in this direction is to determine the impact of transformation of the role and functions of commercial banks on the macro-financial stability of the State and global financial markets.

Взаимосвязь финансового развития и экономического роста России (2000–2022 годы)

The purpose of the study is to establish a dynamic relationship between financial development, measured by the share of liquid liabilities to GDP, and the economic growth of the Russian Federation, measured as GDP per capita, for the period 2000-2022. Based on correlation analysis using the method of wavelet analysis, which allows us to identify empirical patterns in the relationship between variables on different time scales that cannot be detected traditional methods of time series analysis. The results of the study indicate that financial development in general led to economic growth in Russia in 2000-2022 and demonstrated the positive impact of financial development on economic growth, which is observed both in the short, medium and long term, alternating with the negative impact of financial development on economic activity in the short and medium term. This negative effect of financial development on the real sector of the country's economy is typical not only for Russia, but is especially relevant for low- and lower-middle-income countries. It was revealed that short- and medium-term negative effects later turn into positive effects in the long term, which is consistent, in particular, with the endogenous theory of growth. It is concluded that in the practical implementation of the liberalization policy aimed at financial development through financial deepening, it is necessary and important to distinguish between short-term, medium-term and long-term effects of financial development on economic development, given that the positive benefits obtained through financial deepening and liberalization are expected only if the economy is at a certain level the level of economic development, due, for example, to the formation of mature institutions.

Impact of Financial Development on Economic Growth during the Subprime Mortgage Crisis: Evidence from BRICS

The progress and advancement of any country rely significantly on the optimal functioning of its financial sector. Much of the literature is devoted to the analysis of developing countries regarding the impact of financial development on economic growth. However, in the wake of the global financial crisis, the issues and implications needed to be rethought. This study explores the impact of financial development on economic growth with respect to the mortgage crisis using 5 BRICS countries over the period of 1990–2019. The study follows the Interactive regression to find the impact of financial development on the economy with respect to the crisis. The paper employs both random effects and fixed effects to draw conclusions. The results demonstrate that before the crisis, stock market capitalization, liquid liabilities and stock market turnover had a significant impact on economic growth. Furthermore, stock market turnover helps to stabilize the economy in the ongoing crisis. BRICS states should consider the significance of these results as part of their potential financial development policy and strategy necessary to strengthen the economy.

The African Continental Free Trade Area and Financial Development for Female Labour Force Participation in Africa

The study assesses how financial development dynamics can moderate the incidence of African trade integration on female labour force participation. The focus is on 47 African countries for the period 1995 to 2019 and the empirical evidence is based on Fixed Effects regressions. The findings show that financial development moderates African trade integration to engender an overall positive effect on female labour force participation. Moreover, financial depth proxied by liquid liabilities should reach a threshold of approximately 14.304 (% of GDP) in order to completely dampen an initial negative incidence of intra-African trade integration on female labor force participation. It follows that financial development becomes a necessary and sufficient condition to moderate intra-African trade integration in order to positively affect female labor force participation only when the established threshold of financial depth is attained. Other policy implications are discussed.

Impact of Financial Development Shocks on Renewable Energy Consumption in Saudi Arabia

The demand for renewable energy is increasing globally due to concerns about climate change, pollution, and the finite nature of fossil-fuel resources, and renewable energy has been recognized as a significant factor in realizing sustainable development. The government of Saudi Arabia adopted the reduction in fossil-fuel subsidies policy as a financial motivation for supporting both the production and consumption of fossil fuels. Therefore, this study aims to investigate the influence and shocks of Saudi financial development indicators on renewable energy consumption (REC) and to examine the track of causality between financial development indicators and REC. The study covers the annual data period of 1990–2021 and applies the Basic Vector Autoregressive model (VAR), the Granger causality test, forecast-error variance decomposition (FEVD), and the impulse response function (IRF). In the short run, the VAR results indicate a positive and significant impact of stock price volatility and private credit on REC. The results of causality between REC and financial development indicators were conflicting. The Granger causality test shows significant causality running from stock price volatility and private credit to REC. The FEVD results reveal that REC variation is explained by its innovative shocks and has a positive response to shocks in financial development. The IRF results show that REC has a positive response to shock on private credit, liquid liabilities, and stock price volatility. Authorities can encourage investment in renewable energy consumption by providing financial incentives; also, governments can foster national and international partnerships between investors, policymakers, and industry stakeholders. Employing different determinants of financial development indicators and incorporating population factors in the REC function will be highly recommended for forming the renewable energy demand in Saudi Arabia. Conducting a micro-level analysis of specific sectors within renewable energy, such as solar, wind, and others, can provide actionable insights for policymakers.

Assessing Macroeconomic Determinants of Banks’ Efficiency in the West African Monetary Zone

Purpose: This study assesses how six selected macroeconomic variables, namely, size of the banking system, liquid liability of the system, interest rate, inflation, gross domestic product and exchange rate affect banking system efficiency in the West African Monetary Zone countries group. Spanning a twenty-nine-year period (1992 – 2020).
 Methodology: the study used fixed and random effect models of panel least squares to analyze the relationship between these macroeconomic variables and bank efficiency of the countries as a group. Further, the study analyzed the country-by-country net effect of the selected macroeconomic variables on bank efficiency.
 Findings: We find that when examined as a group, only the positive effect of exchange rate on bank efficiency is significant. We also find reveal that the macroeconomic variables have negative effect on bank efficiency in Gambia, Ghana and Sierra Leone while they positively affected bank efficiency in Guinea, Liberia and Nigeria. Finally, we find that interest rate and inflation have causal relationship with bank efficiency in the countries as a group.
 Unique Contribution to Theory, Practice and Policy (Recommendations: We advocate that bankers in the WAMZ critically appraise their size, liquidity and interest rates vis-à-vis their efficiency goal. We also recommend that the governments of Gambia, Ghana and Sierra Leone formulate bank friendly policies especially with respect to interest rates and inflation variables that have causal relationship with bank

Nexus Between Monetary Policy & Liquidity Creation; Study From The Perspective Of Pakistan

The study investigates whether Pakistan's conventional banks create liquidity in response to monetary policy. The secondary data is gathered from the Thomson Reuter financial data streams. The annual time series data is collected from 2000 to 2021. Conventional banks create liquidity by using liquid liabilities to finance illiquid assets. Ali & Ahmad (2022) estimated the quantity of liquidity created by conventional banks in Pakistan over the past 21 years using the Catfat model developed by Berger and Bouwman (2009). The current study used the estimated amount to examine the impact of monetary policy on liquidity creation by using the simple linear regression econometric model. The outcomes of the study indicate that monetary policy has a significant positive impact on liquidity creation in Pakistan. By regulating the monetary policy rate, the State Bank of Pakistan manages the amount of liquidity that conventional banks create. The decisions made by the State Bank of Pakistan are crucial for the economic development of a country. The future implication of the study is that several bank-specific and industry-specific factors affect liquidity creation, so there is a need to explore the same in different regions of the world.

Wealth, Portfolios, and Nonemployment Duration

AbstractWe use administrative data on individual balance sheets in Denmark to document how an individual's financial position affects job search behavior. We look at the effect of wealth at the entry into unemployment on the exit rate from unemployment as well as the effect on the subsequent match quality. The detailed data allow us not only to distinguish between liquid and illiquid parts, but also to decompose each of them into assets and liabilities. The decomposition of wealth into these four components is key to understanding how wealth affects job finding rates. In particular, we show that liquid assets reduce the probability of becoming reemployed, but we do not see an effect of liquid liabilities or the illiquid wealth components, while interest payments speed up reemployment. The results on subsequent match quality in form of job duration and wages are mixed.

The financial Kuznets curve of energy consumption: Global evidence

In this study, we explore the simultaneous existence of a Financial Kuznets Curve -an inverted U-shape relation between financial development and energy consumption- and Income Kuznets Curve -an inverted U-shape relation between income and energy consumption-for a panel of 85 countries. In terms of the financial Kuznets relation, we compare the effects of three stock market development indicators (i.e., stock market capitalization ratio, stock market value traded, and stock market turnover ratio) with the counterpart effects of three credit market indicators (i.e., domestic credit provided by the banking sector, liquid liabilities, and broad money supply. Drawing on the existing literature, we control for changes in country openness, natural resource endowments, and inflation by applying four methods in parallel: the parametric analysis (dynamic system GMM), and the non-parametric (panel quantile regression) as a robustness check. The results for both Kuznets curves are robust to all four methods. They indicate a simultaneous existence of an income Kuznets curve and a Financial Kuznets Curve when the indicators of the stock market development are considered. However, no Financial Kuznets Curve exists with respect to the credit markets’ development. When the credit markets are considered, only the income Kuznets curve is detected. The existence of a relationship between the stock market development and energy consumption has implications for national energy policies. Stock markets should be used actively for the promotion and funding of “green finance” industrial projects, encouraging innovation and new technologies for cleaner production. Our findings are also useful for crafting different financial development policies for countries that are seeking to encourage or discourage energy consumption.

FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH IN CAMEROON: AN ARDL BOUND TEST AND MULTIVARIATE GRANGER CAUSALITY FRAMEWORK

Although the financial system development is vital for a country’s economic growth, it is still underdeveloped in most developing countries due to poor financial policies in terms of formulation and implementation. Therefore, this study aims to examine the effects of financial system development on the economic growth of Cameroon from 1980-2020. The study makes use of the ARDL bound test and multivariate Granger causality test. The results indicate that the financial development index and liquid liabilities have short and long run positive and significant effects on economic growth. Also, the result further reveals that in the short run, there is bidirectional causality between liquid liabilities and economic growth and a unidirectional causality running from financial development index to economic growth while in the long run, causal relationship runs from financial development to economic growth. The study recommends that the government should improve its financial system by constantly monitoring the sector to create an efficient, competitive, and stable financial sector that can contribute significantly to boosting economic growth.

The importance of Banking sector in the growth of Nation economy: A case study of Stanbic bank in South Sudan

The banking industry is essential to supporting other institutions and general economic development in sub-Saharan African countries, acting as a vital support system for other institutions and overall economic development. This research aims to examine the correlation between banking sector assets, bank deposits, and liquid liabilities and their implications for the economy. A comprehensive survey was conducted, targeting all commercial banks in South Sudan. The questionnaire was completed by 50 directors, managers, and senior officers. The findings showed a tenuous inverse link between consumer deposits and economic expansion. To address these concerns, it is imperative for the government to establish a stable political system, exercise fiscal discipline, and establish effective information infrastructure within the banking sector. Policymakers should also prioritize tackling tax evasion and avoidance to bolster bank profitability and effectively deal with the challenges faced by the economy.

Financial Deepening and Economic Growth in Zambia

A strong financial system with a wide range of financial services has an impact on economic growth and development. In this paper, we examine the effects of financial deepening on Zambia’s economic growth using data from 1986 to 2017. Financial deepening is approximated by domestic credit to the private sector as a ratio of GDP (DCPY), liquid liabilities as a ratio of GDP (LLY), and financial system deposits as a ratio of GDP (FSD). We use bound test approach to co-integration that justified the use of the Autoregressive Distributed Lag (ARDL) model. The study found that DCPY had an insignificant effect in the short-run but a significant negative effect in the long-run, whilst the variables LLY and FSD had insignificant effects in both the long-run but their two previous values had significant effects in the short-run. LLY’s values had positive significant effects while FSD’s values had negative significant effects. Therefore we concluded that there is weak link between financial deepening variables and GDP growth rate in Zambia.

Effects of macro-financial shocks on bank liquidity creation: evidence from Mongolia

This paper examines the effects of macro-financial shocks on bank liquidity creation in Mongolia, a developing and commodity-exporting economy, using a structural Bayesian vector autoregression (SBVAR). Ten structural shocks (three external and seven domestic shocks) are identified using a triangular factorization. The main results are (i) the measured bank liquidity creation (as a share of total assets) is procyclical and negatively correlated with the liquidity coverage ratio in the banking sector; (ii) external shocks (the US monetary policy, Chinese economic activity, and changes in the global commodity market) have statistically significant and economically major effects on the liquidity creation. Lending rate, NPL ratio, foreign exchange reserves, and competition in the banking sector are key domestic determinants of liquidity creation; (iii) liquidity creation’s main components respond differently to the US federal funds rate and lending rate shocks. External and financial shocks have contributed to the liquidity creation passing through movements in (illiquid assets + liquid liabilities) component; (iv) monetary policy can be an effective counter-cyclical policy instrument in stabilizing the economic and financial cycles.

Energy consumption, financial development, CO2 emissions, and economic growth in 23 developing economies

This study examines the nexus among energy consumption, CO2 emissions, financial development, and economic growth in 23 developing countries. The econometric approach is based on panel pairwise Granger causality and GMM estimations of panel VAR-Granger causality with fixed effects. Our study is probably one of the first to estimate joint relationships between financial (bank credit to private sector and liquid liabilities), energy (primary energy consumption and electricity generation), environmental (CO2 emissions), and economic variables (GDP and inflation rates) in less developed economies over the 2001-2019 period. The results confirm bidirectional causality between financial development and CO2, financial development and GDP, and primary energy consumption and CO2; and unidirectional from financial development to energy consumption and from electricity generation to CO2. We did not find evidence of a relationship between GDP and energy or CO2 emissions. Due to data availability, we could not complement our analysis with further testing, which would enrich the results. The research may guide policymakers in designing policies to reduce contamination, improve energy use, and promote financial development.