Do contractionary monetary policy shocks expand shadow banking?

Do contractionary monetary policy shocks expand shadow banking? Using VAR models for the USA, we find that a contractionary monetary policy shock has a persistent negative impact on the level of commercial bank assets, but increases the assets of shadow banks and securitization activity. To explain this “waterbed” effect, we propose a standard New Keynesian model featuring both commercial and shadow banks, and we show that the model comes close to explaining the empirical results. Our findings cast doubt on the idea that monetary policy can usefully “get in all the cracks” of the financial sector in a uniform way. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Applied Econometrics Wiley

Do contractionary monetary policy shocks expand shadow banking?

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Publisher
Wiley Subscription Services, Inc., A Wiley Company
Copyright
Copyright © 2018 John Wiley & Sons, Ltd.
ISSN
0883-7252
eISSN
1099-1255
D.O.I.
10.1002/jae.2594
Publisher site
See Article on Publisher Site

Abstract

Using VAR models for the USA, we find that a contractionary monetary policy shock has a persistent negative impact on the level of commercial bank assets, but increases the assets of shadow banks and securitization activity. To explain this “waterbed” effect, we propose a standard New Keynesian model featuring both commercial and shadow banks, and we show that the model comes close to explaining the empirical results. Our findings cast doubt on the idea that monetary policy can usefully “get in all the cracks” of the financial sector in a uniform way.

Journal

Journal of Applied EconometricsWiley

Published: Jan 1, 2018

References

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