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The real effects of liquidity: Puerto Rico as a natural experiment

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  • Carlos D. Ramirez

Abstract

This paper investigates the consequences of a large and sustained liquidity infusion on the real economy using Section 936 tax incentives in Puerto Rico as a natural experiment. I find that the tax incentives increased liquidity and lowered the cost of funds for PR banks. Furthermore, 936 funds stimulated C&I and real estate loans. However, the incidence of troubled loans increases with the amount of 936 funds received, pointing to excessive and inefficient financing in those sectors. The implementation and subsequent removal of these incentives induced a structural shift in Puerto Rico's economy, generating an unintended and long‐lasting boom‐bust cycle.

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  • Carlos D. Ramirez, 2021. "The real effects of liquidity: Puerto Rico as a natural experiment," Economic Inquiry, Western Economic Association International, vol. 59(3), pages 1172-1191, July.
    • Handle: RePEc:bla:ecinqu:v:59:y:2021:i:3:p:1172-1191
    DOI: 10.1111/ecin.12987
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