The Impacts of Excess Liquidity on Risk-Taking Behaviors in the Wake of EPU and Past Crisis Experiences: Cross-Sectoral Dynamics

The dissertation investigates how the impact of excess liquidity, the surplus funds available in the financial system, on risk-taking behaviors is disrupted under the presence of higher Economic Policy Uncertainty (EPU) in the banking, business, and household sectors. Besides, the research continues to identify whether the moderating effect of higher EPU will be strengthened in countries which were heavily affected by the 2008 Global Financial Crisis (GFC). The empirical study takes advantage of the System Generalized Methods of Moments (SGMM) estimator to deal with the endogenous problem caused by the correlation between the error terms and the one-lagged risk-taking variable in the dynamic model. The satisfied tests for SGMM demonstrate the appropriateness of the estimation technique for the regression models. The research employs the unbalanced panel data covering 197 countries around the world over the period of 2000 – 2019. Based on the estimations from all models, the study finds that excess liquidity induces risk-taking behaviors in commercial banks, corporate enterprises, and households. However, an increase in EPU is supposed to attenuate the positive impact of excess liquidity on risk-taking behaviors across three sectors because commercial banks, businesses, and households are inclined to be more prudent in their liquidity problems when being exposed to higher EPU. Furthermore, the research clarifies that commercial banks, corporate enterprises, and households in countries which were severely affected by the GFC will express stronger prudence towards higher EPU in the condition of excess liquidity. By integrating Excess Liquidity Theory into Agency Theory, Real Option Theory, and Heuristic Theory, the research findings fill the gap of the risk-taking behaviors induced by excess liquidity beyond the banking sector by extending its examination to the business and household sectors which are also under the influence of excess fundings. Finally, the study suggests that EPU can be utilized as an automatic stabilizer in mitigating risk-taking behaviors caused by excess liquidity. Additionally, compared to their counterparts, policymakers in countries which were slightly affected by the GFC should be more aggressive in strengthening the monitoring mechanisms towards risk-taking behaviors across three sectors because the automatic stabilizer of EPU controlled by past experiences of negative shocks from the GFC is demonstrated to be weaker.