Does Language Affect Bank Liquidity Creation?: A Global Cross-Country Analysis

Abstract

Languages that grammatically mark the future influence the speakers’ intertemporal preferences, and thereby induce less future-oriented behavior. We predict that banks in countries with future tense marking reduce the perception of risk, and therefore they are more likely to engage in risky banking activities, leading to an increase in bank liquidity creation. We use data from 60 countries for testing such a linguistic hypothesis, and we find that banks in countries with future tense marking create higher liquidity than those in countries where speakers grammatically associate the future and the present. This is robust to using alternative measures of a country’s culture, alternative future tense reference, and several robustness checks. Our finding provides a new explanation for cross-country heterogeneity in bank output and contributes to the debate about the effect of language on economic behavior.