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

Posted: 4 Nov 2008

See all articles by Asim Ijaz Khwaja

Asim Ijaz Khwaja

Harvard University - Harvard Kennedy School (HKS); Center for Research on Pensions and Welfare Policies (CeRP); Bureau for Research and Economic Analysis of Development (BREAD); National Bureau of Economic Research (NBER)

Atif R. Mian

Princeton University - Department of Economics; Princeton University - Woodrow Wilson School of Public and International Affairs; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: November 3, 2008

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% larger decline in liquidity drops by an additional 0.6%. 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.

Suggested Citation

Khwaja, Asim Ijaz and Mian, Atif R., Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market (November 3, 2008). American Economic Review, Vol. 98, No. 4, 2008. Available at SSRN: https://ssrn.com/abstract=1294908

Asim Ijaz Khwaja

Harvard University - Harvard Kennedy School (HKS) ( email )

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Center for Research on Pensions and Welfare Policies (CeRP) ( email )

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Bureau for Research and Economic Analysis of Development (BREAD) ( email )

Duke University
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United States

National Bureau of Economic Research (NBER) ( email )

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Atif R. Mian (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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