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American Economic Review: Vol. 98 No. 4 (September 2008)

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

Article Citation

Khwaja, Asim Ijaz, and Atif Mian. 2008. "Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market." American Economic Review, 98(4): 1413-42.

DOI: 10.1257/aer.98.4.1413

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. (JEL E44, G21, G32, L25)

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Authors

Khwaja, Asim Ijaz (Harvard U)
Mian, Atif (U Chicago)

JEL Classifications

E44: Financial Markets and the Macroeconomy
G21: Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G32: Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
L25: Firm Performance: Size, Diversification, and Scope


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