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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. Gregory de Walque & Olivier Pierrard & Abdelaziz Rouabah, 2008. "Financial (in)stability, supervision and liquidity injections: a dynamic general equilibrium approach," BCL working papers 35, Central Bank of Luxembourg.
  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. Skander Van den Heuvel, 2005. "The Welfare Cost of Bank Capital Requirements," 2005 Meeting Papers 880, Society for Economic Dynamics.
  4. Fiorella De Fiore & Harald Uhlig, 2005. "Bank finance versus bond finance: what explains the differences between US and Europe?," SFB 649 Discussion Papers SFB649DP2005-042, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
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  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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