Liquidity Risk and Long-Term Finance: Evidence from a Natural Experiment

Ali Choudhary and Nicola Limodio

The Review of Economic Studies, 2022, vol. 89, issue 3, 1278-1313

Abstract: Banks in low-income countries face severe liquidity risk due to volatile deposits, which destabilize their funding, and dysfunctional liquidity markets, which induce expensive interbank and central bank lending. Such liquidity risk dissuades the transformation of short-term deposits into long-term loans and deters long-term investment. To validate this mechanism, we exploit a Sharia-compliant levy in Pakistan, which generates unintended and quasi-experimental variation in liquidity risk, with data from the credit registry and firm imports. We find that banks with a stronger exposure to liquidity risk lower their supply of long-term finance, which reduces the long-term investment of connected firms.

Keywords: Banking; Investment; Financial development; Central banks; G21; O16; O12; E58 (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://hdl.handle.net/10.1093/restud/rdab065 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:89:y:2022:i:3:p:1278-1313.

Access Statistics for this article

The Review of Economic Studies is currently edited by Thomas Chaney, Xavier d’Haultfoeuille, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Katrine Loken, Elias Papaioannou, Vincent Sterk and Noam Yuchtman

More articles in The Review of Economic Studies from Review of Economic Studies Ltd
Bibliographic data for series maintained by Oxford University Press ().