Impact of monetary policy on bank liquidity creation: Economic policy uncertainty channel
Abstract
This study examines how monetary policy affects bank liquidity creation in the U.S. from 2001 to 2022. Utilizing a dynamic panel Generalized Method of Moments (GMM) estimator on quarterly bank-level data, the findings indicate that monetary policy exerts a significant negative effect on bank liquidity creation. Crucially, the results demonstrate that economic policy uncertainty (EPU) acts as a key transmission channel through which monetary policy influences the banking sector’s output. This adverse effect is particularly pronounced during periods of negative output gaps, suggesting that policy-induced uncertainty significantly dampens the supply of credit during specific economic cycles. These results remain robust across alternative measures of bank liquidity creation, including both category- and maturity-based indices. These findings offer important policy implications, highlighting the need for central banks to account for the mediating role of uncertainty when designing monetary interventions to mitigate shocks to the banking sector.