Liquidity Creation, Oil Term of Trade Shocks, and Growth Volatility in Middle Eastern and North African Countries (MENA)

Abstract

Both real and monetary shocks have been extensively researched, with conflicting findings on the involvement of the banking sector following the occurrence of these shocks. Nonetheless, liquidity creation (LC) appears to be one of the most underappreciated banking operations. This research analyses the impact of LC on economic volatility and the mechanisms through which LC influences volatility in 10 MENA countries from 2000 to 2019. Using a recently published panel cointegration estimating approach, we show that LC does influence growth volatility over the long term and short term—in other words, LC, as a primary activity of banks, helps to reduce volatility. According to PMG’s findings, both real and monetary shocks significantly increase volatility in the short term compared to their influence in the long term. The channels of expression show that LC mitigates the influence of real shocks (amplifies the effect of monetary shocks) on growth volatility, and there is a greater magnitude of this effect in the short term. Strengthening the banking industry through LC, which is their primary business, could be a critical strategy in avoiding economic swings.

A Wavelet Investigation of Periodic Long Swings in the Economy: The Original Data of Kondratieff and Some Important Series of GDP per Capita

“…Originally introduced by Muth (1960Muth ( , 1961, the concept of rational expectations was developed about a decade later for stabilization policy issues by Lucas (1972Lucas ( , 1973, and then for the establishment of "an apparent equilibrium theory of the business cycle" (Lucas 1977) as reported by Kantor (1979). Now, the theoretical basis for considering business cycle volatility as a normal part of a growing economy rests on the real business cycle approach (Almeshari et al 2023). This idea stems from the seminal and inspiring contribution of Nelson and Plosser (1982) who distinguished between stationary oscillations of output around a deterministic trend and non-stationarity resulting from accumulation over time.…”