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Bank Liquid creation and investment in Iran
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Mahshid Shahchera *    |
| Banking Department, Monetary and Banking Research Institute |
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Abstract: (17 Views) |
| Banks are essential drivers of economic growth, primarily because they mobilize savings and channel capital into productive sectors. By transforming liquid liabilities into illiquid assets, banks provide the financial services necessary for investment and capital formation. Given this central economic role, this study investigates the impact of bank liquidity creation on investment, examining both linear and nonlinear effects. The researchers utilize an empirical model incorporating liquidity creation and its squared term to capture these dynamics. The results indicate a significant positive linear relationship: expanding a bank's capacity to create liquidity alleviates financing constraints, thereby increasing the availability of financial resources and stimulating investment activities. However, the study reveals a more complex reality through nonlinear analysis, identifying an inverted U-shaped relationship between liquidity creation and investment. While moderate levels of liquidity creation effectively promote capital accumulation, excessive creation eventually yields diminishing returns, ultimately reducing its positive influence. This finding suggests that the effectiveness of liquidity creation is not indefinite; beyond a certain threshold, its benefits decline. Consequently, the study emphasizes that maintaining an *optimal* level of liquidity creation is crucial for supporting sustainable investment and long-term economic growth. Policymakers must therefore balance the expansion of financial resources with the potential risks of over-liquidity to ensure stable, long-term economic development. |
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| Keywords: Liquidity creation, investment, banking, financing |
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Full-Text [PDF 900 kb]
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Type of Study: Research |
Subject:
Special
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