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Implications of Shadow Bank Regulation for Monetary Policy at the Zero Lower Bound

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  • Falk Mazelis

Abstract

Counter to the credit channel of monetary transmission, monetary policy tightening induces a rise in lending by two di erent types of non-bank nancial institutions (NBFI): shadow banks and investment funds. A monetary DSGE model is able to replicate the empirical facts when augmented with interme- diaries that allow for regulatory arbitrage on the one hand, and household portfolio rebalancing on the other. Therefore NBFI reduce the e ectiveness of the bank lending channel, which posits a decrease in bank lending following monetary tightening. Given the pending regulation of the nancial system, I study how regulation of the shadow banking sector may a ect the monetary transmission mechanism, especially during a zero lower bound (ZLB) episode. I nd that bringing shadow banks back onto the balance sheets of commercial banks is bene cial for consumption smoothing. Alternatively, regulating them like investment funds results in a milder recession during, and a quicker escape from, the ZLB. This is because a large demand shock that moves the economy to the ZLB acts in a similar way to a monetary tightening due to the inability to lower the policy rate to the unconstrained level. Consequently, the bank lending channel becomes operational and its e ectiveness can be reduced via less reliance on deposit funding.

Suggested Citation

  • Falk Mazelis, 2016. "Implications of Shadow Bank Regulation for Monetary Policy at the Zero Lower Bound," SFB 649 Discussion Papers SFB649DP2016-043, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  • Handle: RePEc:hum:wpaper:sfb649dp2016-043
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    Cited by:

    1. Gebauer, Stefan & Mazelis, Falk, 2018. "The Role of Shadow Banking for Financial Regulation," Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181581, Verein für Socialpolitik / German Economic Association.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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