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

  • Asim Ijaz Khwaja
  • Atif Mian

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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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 4 (September)
Pages: 1413-42

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Handle: RePEc:aea:aecrev:v:98:y:2008:i:4:p:1413-42
Note: DOI: 10.1257/aer.98.4.1413
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  1. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
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