Working Paper: CEPR ID: DP14925
Authors: Mrinal Mishra; Steven Ongena
Abstract: We study the effect of armed conflict on loan officers and their actual lending decisions. Following mortar shelling of Indian border areas in the state of Jammu & Kashmir, we document that after repeated incidences of shelling the loan rates set by the loan officers exponentially increase. While the immediate effect may be driven by a rational response due to altering beliefs, the later rate hikes suggest an “overreaction”. Our study reveals that the real costs of armed conflict through loan pricing are not trivial, and what we document is informative about liquidity shortfalls or credit spirals arising from non-conflictuous political, economic or pandemic shocks.
Keywords: bank lending; war; interest rate
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shelling (Y50) | loan interest rates (E43) |
| first two shelling incidents (Y50) | loan interest rates (E43) |
| third shelling incident (Y50) | loan interest rates (E43) |
| loan interest rates (E43) | lending behavior (G21) |
| conflict exposure (D74) | loan interest rates (E43) |
| altered beliefs regarding future defaults (G41) | loan interest rates (E43) |
| supply-side effect (E65) | loan interest rates (E43) |
| reallocation of lending towards safer loans (G21) | loan interest rates (E43) |