American Economic Review Vol. 98 No. 4 2008

Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market

Asim Ijaz Khwaja¹; Atif Mian²

¹ JFK School of Government, Harvard University, Mailbox 46, 79 JFK Street, Cambridge, MA 02138, and BREAD. · ² Graduate School of Business, University of Chicago, 5807 South Woodlawn Ave., Chicago, IL 60637, and NBER.

Abstract

We examine the impact of liquidity shocks by exploiting cross-bank liquidity variation induced by unanticipated nuclear tests in Pakistan. We show that for the same firm borrowing from two different banks, its loan from the bank experiencing a 1 percent larger decline in liquidity drops by an additional 0.6 percent. While banks pass their liquidity shocks on to firms, large firms—particularly those with strong business or political ties—completely compensate this loss by additional borrowing through the credit market. Small firms are unable to do so and face large drops in overall borrowing and increased financial distress.

DOI

10.1257/aer.98.4.1413

Volume

98

Issue

4

Pages

1413-1442

Language

en

Sources

openalex bibtex:phds-export.bib crossref

Cite

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