The connection between Wall Street and Main Street : measurement and implications for monetary policy
AbstractThis paper proposes a measure of the extent to which a financial sector is connected to the real economy. The Measure of Connectedness is a measure of the composition of assets, namely the share of credit to the non-financial sectors over the total credit market instruments. The aggregate Measure of Connectedness for the United States declines by about 27 percent in the period 1952-2009. The authors suggest that this increase in disconnectedness between the financial sector and the real economy may have dampened the sensitivity of the real economy to monetary shocks. They present a stylized model that illustrates how interbank trading can reduce the sensitivity of lending to the entrepreneur's net worth, thereby dampening the credit channel transmission of monetary policy. The Measure of Connectedness is interacted with both a structural vector autoregressive model and a factor-augmented vector autoregressive model for the United States economy. The analysis establishes that the impulse responses to monetary policy shocks are dampened as the level of connection declines.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 6667.
Date of creation: 01 Oct 2013
Date of revision:
Debt Markets; Access to Finance; Emerging Markets; Financial Intermediation; Economic Theory&Research;
Other versions of this item:
- Alessandro Barattieri & Maya Eden & Dalibor Stevanovic, 2013. "The Connection between Wall Street and Main Street: Measurement and Implications for Monetary Policy," Cahiers de recherche 1331, CIRPEE.
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- G20 - Financial Economics - - Financial Institutions and Services - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-25 (All new papers)
- NEP-MAC-2013-10-25 (Macroeconomics)
- NEP-MON-2013-10-25 (Monetary Economics)
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