Journal of Applied Finance & Banking

Can Liquidity Constraints Explain the Differences of Growth Across Countries?

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  • Abstract 

    This paper conducts an empirical research on the relations between liquidity constraints and economic growth. Based on Kiyotaki & Moore (2019), we establish our econometric model and do regressions with a panel data covering 33 countries from 1996 to 2017. Countries in our sample include developed and developing countries. We find that increasing liquidity premium by 1%, will decrease the growth rate of capital by 0.31%, and that of GDP by 0.24%. Moreover, developing countries appear to be more sensitive to the change of liquidity premium, with more decreasing by 0.31% on capital growth and 0.22% on GDP growth than developed countries, when equally faced with 1% increase of liquidity premium. It can be inferred that different level of liquidity constraints, leading to a different level of liquidity premium, partially explain the differences of growth across countries.

    Keywords: liquidity constraints, monetary model, economic divergence