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The Connection between Wall Street and Main Street: Measurement and Implications for Monetary Policy

  • Alessandro Barattieri
  • Maya Eden
  • Dalibor Stevanovic

We propose a measure of the extent to which a financial sector is connected to the real economy. The Measure of Connectedness is the share of credit market instruments represented by claims whose direct counterpart belongs to the non-financial sectors. The aggregate U.S. Measure of Connectedness declines by about 27% in the period 1952-2009. We 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. We 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. Finally, we interact our measure with both a SVAR and a FAVAR for the U.S. economy, and establish that the impulse responses to monetary policy shocks are dampened as the level of connection declines.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 2013s-31.

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Length: 40 pages
Date of creation: 01 Aug 2013
Date of revision:
Handle: RePEc:cir:cirwor:2013s-31
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  1. Nicola Gennaioli & Andrei Shleifer & Robert Vishny, . "Finance and the Preservation of Wealth," Working Paper 81051, Harvard University OpenScholar.
  2. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  3. Altunbas, Yener & Gambacorta, Leonardo & Marques-Ibanez, David, 2009. "Securitisation and the bank lending channel," European Economic Review, Elsevier, vol. 53(8), pages 996-1009, November.
  4. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
  5. Diebold, Francis X. & Yilmaz, Kamil, 2012. "Better to give than to receive: Predictive directional measurement of volatility spillovers," International Journal of Forecasting, Elsevier, vol. 28(1), pages 57-66.
  6. Valentina Bruno & Hyun Song Shin, 2013. "Capital Flows and the Risk-Taking Channel of Monetary Policy," Working Papers 1469, Princeton University, Department of Economics, Center for Economic Policy Studies..
  7. Dynan, Karen E. & Elmendorf, Douglas W. & Sichel, Daniel E., 2006. "Can financial innovation help to explain the reduced volatility of economic activity?," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 123-150, January.
  8. Jean-Stéphane Mésonnier & Dalibor Stevanovic, 2013. "Bank Leverage Shocks and the Macroeconomy: a New Look in a Data-Rich Environment," Cahiers de recherche 1330, CIRPEE.
  9. Francis X. Diebold & Kamil Yilmaz, 2011. "On the network topology of variance decompositions: Measuring the connectedness of financial firms," Working Papers 11-45, Federal Reserve Bank of Philadelphia.
  10. Thomas Philippon & Ariell Reshef, 2013. "An International Look at the Growth of Modern Finance," Journal of Economic Perspectives, American Economic Association, vol. 27(2), pages 73-96, Spring.
  11. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, MIT Press, vol. 125(1), pages 307-362, February.
  12. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 236-251.
  13. Thomas Philippon & Ariell Reshef, 2009. "Wages and Human Capital in the U.S. Financial Industry: 1909-2006," NBER Working Papers 14644, National Bureau of Economic Research, Inc.
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