Precautionary liquidity shocks, excess reserves and business cycles

Bratsiotis, George J. and Theodoridis, Konstantinos ORCID: https://orcid.org/0000-0002-4039-3895 2022. Precautionary liquidity shocks, excess reserves and business cycles. Journal of International Financial Markets, Institutions and Money 77 , 101518. 10.1016/j.intfin.2022.101518

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Abstract

This paper identifies a precautionary banking liquidity shock via a set of sign, zero and forecast variance restrictions imposed. The shock proxies the banking sector’s reluctance to lend to the real economy induced by an exogenous preference change for liquid assets. Through the lens of a DSGE model, the precautionary liquidity shock is shown to work through two channels: reserves (balance sheet) and the deposit rate (intertemporal effect). The overall effect is a downward co-movement in output, consumption, investment, and prices, which is amplified the higher are the long-run risks in the economy and banks’ responsiveness to potential risk.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Publisher:	Elsevier
ISSN:	1042-4431
Date of First Compliant Deposit:	12 January 2022
Date of Acceptance:	10 January 2022
Last Modified:	06 Nov 2023 15:56
URI:	https://orca.cardiff.ac.uk/id/eprint/146481

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