Tracing the impact of bank liquidity shocks: Evidence from an emerging market

Asim Ijaz Khwaja, Atif Mian

Research output: Contribution to journalArticle

316 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)1413-1442
Number of pages30
JournalAmerican Economic Review
Volume98
Issue number4
DOIs
StatePublished - Sep 2008
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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