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Monetary policy shocks in a DSGE model with a shadow banking system

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Author Info

  • Fabio Verona

    ()
    (Universidade do Porto, Faculdade de Economia and CEF.UP)

  • Manuel M. F. Martins

    ()
    (Universidade do Porto, Faculdade de Economia and CEF.UP)

  • Inês Drumond

    ()
    (Universidade do Porto, Faculdade de Economia and CEF.UP, and GPEARI-MFAP)

Abstract

This paper is motivated by the recent financial crisis and addresses whether a “too low for too long” interest rate policy may generate a boom-bust cycle. We suggest a model in which a microfounded shadow banking sector is included in an otherwise state-of-the-art DSGE model. When faced with perverse incentives, financial intermediaries within the shadow banking sector can divert a fraction of stockholders’ profits for their own benefits and extend credit at a discounted rate. The model predicts that long periods of accommodative monetary policy do create the preconditions for, but do not cause per se, a boom-bust cycle. Rather, it is the combination of a persistent monetary ease with microeconomic distortions in the financial system that causes a boom-bust.

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Bibliographic Info

Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series CEF.UP Working Papers with number 1101.

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Length: 61 pages
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:por:cetedp:1101

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Keywords: monetary policy; DSGE model; shadow banking system; boom-bust;

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  1. De Fiore, Fiorella & Uhlig, Harald, 2005. "Bank finance versus bond finance: what explains the differences between US and Europe?," Working Paper Series 0547, European Central Bank.
  2. Roger Aliaga‐Díaz & María Pía Olivero, 2010. "Macroeconomic Implications of “Deep Habits” in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(8), pages 1495-1521, December.
  3. Van den Heuvel, Skander J., 2008. "The welfare cost of bank capital requirements," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 298-320, March.
  4. Javier Andrés & Óscar J. Arce, 2009. "Banking competition, housing prices and macroeconomic stability," Banco de Espa�a Working Papers 0830, Banco de Espa�a.
  5. Werner F. M. De Bondt & Richard H. Thaler, 1994. "Financial Decision-Making in Markets and Firms: A Behavioral Perspective," NBER Working Papers 4777, National Bureau of Economic Research, Inc.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Monetary policy shocks in a DSGE model with a shadow banking system
    by Christian Zimmermann in NEP-DGE blog on 2011-02-21 03:53:54

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