Publication: Dollars Dollars Everywhere, nor Any Dime to Lend : Credit Limit Constraints on Financial Sector Absorptive Capacity
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Date
2010
ISSN
08939454
Published
2010
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We exploit an unexpected inflow of liquidity in an emerging market to study how capital is intermediated to firms. We find that backward-looking credit limit constraints imposed by banks make it difficult for firms to borrow, despite readily available bank liquidity, healthy aggregate demand, and a sharply falling cost of capital. The resulting aggregate failure to extend and retain capital in the economy suggests that agency costs that force banks to rely on sticky balance-sheet-based credit limits prevent emerging economies from effectively intermediating capital.
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