Is too much liquidity harmful to economic growth?

This paper studies the relationship between financial liquidity and economic growth. Using a panel data of 136 countries, we find that there exists a threshold, above which the marginal effect of financial liquidity on economic growth changes from positive to negative. In particular, the turning points for which domestic credit to private sector and stock market turnover start having negative effects on growth are 104% GDP and 107% respectively. Moreover, although the thresholds in middle- and low-income countries are higher than those in high-income countries, the growth-enhancing effect of financial liquidity is stronger in high-income countries. Our results are robust to income level groups, alternative model specifications, proxies for financial liquidity, and not driven by banking crises or stock market crashes. (C) 2019 Board of Trustees of the University of Illinois. Published by Elsevier Inc. All rights reserved.