Bank Liquidity Creation and Real Economy: VAR Analysis

In this thesis we examine the interactions of bank liquidity creation and real economy using vector autoregression model. We selected inflation, unemployment rate and interest rate as basic economic variables which theoretically could influence bank liquidity creation. We decided to examine the reverse relationship whether bank liquidity creation has a significant impact on real economy. We study these interactions using data from Czech Republic within ten-year period from 2000 to 2010. Our results suggest that macroeconomic fluctuations have a significant impact on bank liquidity creation. The results also support our reverse hypothesis that higher liquidity creation can improve macroeconomic conditions.