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


Khwaja, Asim, and Atif Mian. 2008. “Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market.” American Economic Review 98 (4): 1413-1442.


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.

Publisher's Version

NBER: WP12612, Oct. 2006
JEL: E44, G2, G21, G32, L25
DOI: 10.1257/aer.98.4.1413
Keywords: Financial Markets and the Macroeconomy; Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Firm Performance: Size, Diversification, and Scope
Last updated on 12/09/2015