The relationship between the output gap and excess liquidity: Evidence from Czech Republic, Estonia and Kosovo

• Authors: Kastrati Albulenë , Adnett Nick , Toçi Valentin
• Languages of publication: EN

Abstracts

EN

Aim/purpose – Banks in European Transition Economies are proportionally lending less than their counterparts in the Eurozone in the face of seemingly profitable loan opportunities, whilst apparently continuously holding excess liquidity. The question that arises is whether banks in European Transition Economies are holding excess liquidity that widens the output gap? Design/methodology/approach – Given its endogenous nature, the relationship between the output gap and excess liquidity is estimated using Seemingly Unrelated Regressions method. The research sample covers three European Transition Economies for the period 2004Q1 – 2013Q4. Findings – The results indicate that rather than being in a causal relationship, excess liquidity and the output gap are found to be correlated via common observed and unobserved determinants. Research implications/limitations – The most important policy implication of this research is that since the relationship between output gap and excess liquidity is not causal, reducing excess liquidity will not necessarily lead to a smaller (negative) output gap. There seems to be no straightforward policy framework informed by a clear trans-mission mechanism from excess liquidity to output gap. Originality/value/contribution – This study is novel in two respects. Firstly, assuming endogeneity, a new conceptual relationship between output gap and excess liquidity is presented. Secondly, empirical evidence is presented using the system equation method Seemingly Unrelated Regression, not previously used in this context.

Keywords

EN

Excess liquidity; Output gap; System equation models; Transition economies

• Publisher: Uniwersytet Ekonomiczny w Katowicach
• Journal: Journal of Economics and Management
• Year: 2018
• Volume: 31
• Pages: 95-118

Contributors

author

Kastrati Albulenë

• Economics Faculty. AAB College, Prishtina, Kosovo

author

Adnett Nick

• School of Business, Leadership and Economics. Staffordshire University, Stoke-on-Trent, UK

author

Toçi Valentin

• Economics Faculty. University of Prishtina, Prishtina, Kosovo

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Identifiers

ISSN

1732-1948