Prague Economic Papers 2022, 31(1):79-114 | DOI: 10.18267/j.pep.793

Paradox of Excess Liquidity in European Emerging and Transition Economies

Albulenë Kastrati ORCID...a
a Duke Unversity, USA and AAB College, Kosovo

European emerging and transition economies are in immense need of investments and renewal of capital, yet they produce a considerable amount of unutilized resources. In particular, banks hold excess liquidity in the face of seemingly profitable lending opportunities. Is it a demand-side or supply-side problem or is this region entirely different and have we been working under the wrong paradigm? This study creates a new estimate of excess liquidity by taking into account banks' overall liquidity position. Breaking down precautionary from involuntary excess liquidity, a significant presence of the latter is evident. A part of the story deals with insensitivity of deposits to interest rates. Based on our standard understanding of how banks work, this is puzzling and this study creates a new way to look at this. Using new measures is the way to launch the investigation of causes and policy implications for involuntary excess liquidity.

Keywords: Excess liquidity, emerging economies, banks, European countries
JEL classification: D53, D60, E44, E52, G21, O16

Received: March 13, 2021; Revised: January 4, 2022; Accepted: January 10, 2022; Published: March 1, 2022  Show citation

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Kastrati, A. (2022). Paradox of Excess Liquidity in European Emerging and Transition Economies. Prague Economic Papers, 31(1), 79-114. doi: 10.18267/j.pep.793
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