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Canadian Shadow Banks and Monetary Policy Effectiveness

Author

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  • Jeremy M. Kronick
  • Yan Wendy Wu

Abstract

Shadow banks, such as investment funds, hedge funds, and mortgage finance companies, have grown rapidly in recent years. We analyze the link between monetary policy and the growth of shadow banks and, by extension, financial stability in Canada. Using monthly financial market data from 1991 to 2015, we first find that contractionary monetary policy does not cause the expected reduction in shadow bank business loans and mortgage loans as it does in chartered bank credit. This suggests that as shadow banks have grown in importance, the effectiveness of monetary policy in reducing inflation has been impaired. We find evidence to support that hypothesis using a two-stage time-varying coefficient Bayesian vector autoregression approach.

Suggested Citation

  • Jeremy M. Kronick & Yan Wendy Wu, 2024. "Canadian Shadow Banks and Monetary Policy Effectiveness," Canadian Public Policy, University of Toronto Press, vol. 50(1), pages 108-126, March.
    • Handle: RePEc:cpp:issued:v:50:y:2024:i:1:p:108-126
    DOI: 10.3138/cpp.2023-004
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    Keywords

    monetary policy; shadow banks; effectiveness; mortgage; business loans; monetary transmission;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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