Dollars Dollars Everywhere, Nor Any Dime to Lend: Credit Limit Constraints on Financial Sector Absorptive Capacity

Asim Ijaz Khwaja, Atif Mian, Bilal Zia

Research output: Contribution to journalArticle

4 Scopus citations

Abstract

We exploit an unexpected inflow of liquidity in an emerging market to study how capital is intermediated to firms. We find that backward-looking credit limit constraints imposed by banks make it difficult for firms to borrow, despite readily available bank liquidity, healthy aggregate demand, and a sharply falling cost of capital. The resulting aggregate failure to extend and retain capital in the economy suggests that agency costs that force banks to rely on sticky balance-sheet-based credit limits prevent emerging economies from effectively intermediating capital.

Original languageEnglish (US)
Pages (from-to)4281-4323
Number of pages43
JournalReview of Financial Studies
Volume23
Issue number12
DOIs
StatePublished - Dec 1 2010
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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