I have done it on an inside wall. I would not do it here on an out side wall. You might also run into wiring in the wall. Books might make a bit of insulation but opening the wall like that on an out side wall might invite the dampness. No idea what your climate it like.

I have had small walk in closets I turned to libraries with a tall book case on the end wall between the hanging clothes. With the coming of my Kindle I got rid of most of my books. I only saved a few that were sentimental to me. And of course craft books. They are in a different room than my other book case now.

I've seen / heard of it being done in kitchen area for storage of spices, small food items (like canned soup). I wouldn't do it on exterior wall either because of removing space/insulation protection from the elements.

Lots of my neighbors have done this for kitchen storage, e.g.;

But I also would not do it on an outside wall. It wouldn't be good for the books, either, in the long term. On an inside wall, sure, have at it.

I wouldn't cut into an outside wall either. How small is your living room? Is there another space in your home to store the books? Maybe you could create a divider somewhere by placing two shelves back-to-back, or buying a library shelf w/shelving on both sides?

Cutting into an exterior wall might be a building code violation. I considered cutting into the wall between the kitchen and the garage for a niche and I was warned about this. Later I was told that fire code requires two sheets of drywall between the home and garage. Also if you need to reframe portions of the wall or move electric or venting it will need to be done to code. So you should check with local building code before doing this.