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Financial Regulation and Shadow Banking: A Small-Scale DSGE Perspective

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  • Patrick Fève

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  • Olivier Pierrard

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Abstract

In this paper, we revisit the role of regulation in a small-scale dynamic stochastic general equilibrium (DSGE) model with interacting traditional and shadow banks. We estimate the model on US data and we show that shadow banking interferes with macro-prudential policies. More precisely, asymmetric regulation causes a leak towards shadow banking which weakens the expected stabilizing effect. A counterfactual experiment shows that a regulation of the whole banking sector would have reduced investment fluctuations by 10% between 2005 and 2015. Our results therefore suggest to base regulation on the economic functions of financial institutions rather than on their legal forms.

Suggested Citation

  • Patrick Fève & Olivier Pierrard, 2017. "Financial Regulation and Shadow Banking: A Small-Scale DSGE Perspective," BCL working papers 111, Central Bank of Luxembourg.
  • Handle: RePEc:bcl:bclwop:bclwp111
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    References listed on IDEAS

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    More about this item

    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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