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Shadow banking and financial regulation: A small-scale DSGE perspective

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Listed:
  • Fève, Patrick
  • Moura, Alban
  • Pierrard, Olivier

Abstract

This paper estimates a small-scale DSGE model of the US economy with interacting traditional and shadow banks. We find that shadow banks amplify the transmission of structural shocks by helping escape constraints from traditional intermediaries. We show how this leakage toward shadow entities reduces the ability of macro-prudential policies targeting traditional credit to reduce economic volatility. A counterfactual experiment suggests that a countercyclical capital buffer, if applied only to traditional banks, would have in fact amplified the boom-bust cycle associated with the financial crisis of 2007–2008. On the other hand, a broader regulation scheme targeting both traditional and shadow credit would have helped stabilize the economy.

Suggested Citation

  • Fève, Patrick & Moura, Alban & Pierrard, Olivier, 2019. "Shadow banking and financial regulation: A small-scale DSGE perspective," Journal of Economic Dynamics and Control, Elsevier, vol. 101(C), pages 130-144.
  • Handle: RePEc:eee:dyncon:v:101:y:2019:i:c:p:130-144
    DOI: 10.1016/j.jedc.2019.02.001
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    Keywords

    Shadow banking; DSGE models; macro-prudential policy;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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