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The Macroeconomics of Shadow Banking

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  • Alan Moreira
  • Alexi Savov

Abstract

We build a macroeconomic model that centers on liquidity transformation in the financial sector. Intermediaries maximize liquidity creation by issuing securities that are money-like in normal times but become illiquid in a crash when collateral is scarce. We call this process shadow banking. A rise in uncertainty raises demand for crash-proof liquidity, forcing intermediaries to delever and substitute toward safe, collateral- intensive liabilities. Shadow banking shrinks, causing the liquidity supply to contract, discount rates and collateral premia spike, prices and investment fall. The model produces slow recoveries, collateral runs, and flight to quality and it provides a framework for analyzing unconventional monetary policy and regulatory reform proposals.

Suggested Citation

  • Alan Moreira & Alexi Savov, 2014. "The Macroeconomics of Shadow Banking," NBER Working Papers 20335, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20335
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    Cited by:

    1. Grung Moe, Thorvald, 2015. "Shadow banking: policy challenges for central banks," Journal of Financial Perspectives, EY Global FS Institute, vol. 3(2), pages 31-42.
    2. Emmanuel Farhi & Matteo Maggiori, 2018. "A Model of the International Monetary System," The Quarterly Journal of Economics, Oxford University Press, vol. 133(1), pages 295-355.
    3. Julian Kozlowski & Laura Veldkamp & Venky Venkateswaran, 2020. "The Tail That Wags the Economy: Beliefs and Persistent Stagnation," Journal of Political Economy, University of Chicago Press, vol. 128(8), pages 2839-2879.
    4. Markus K. Brunnermeier & Yuliy Sannikov, 2016. "Macro, Money and Finance: A Continuous Time Approach," NBER Working Papers 22343, National Bureau of Economic Research, Inc.
    5. 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.
    6. Tobias Adrian & Nellie Liang, 2018. "Monetary Policy, Financial Conditions, and Financial Stability," International Journal of Central Banking, International Journal of Central Banking, vol. 14(1), pages 73-131, January.
    7. Borys Grochulski & Yuzhe Zhang, 2015. "Optimal Liquidity Regulation With Shadow Banking," Working Paper 15-12, Federal Reserve Bank of Richmond.
    8. Antonio Bianco, 2015. "Shadow banking, relationship banking, and the economics of depression," PSL Quarterly Review, Economia civile, vol. 68(275), pages 297-326.
    9. Giroud, Xavier & Mueller, Holger M, 2015. "Firm Leverage and Unemployment during the Great Recession," CEPR Discussion Papers 10539, C.E.P.R. Discussion Papers.
    10. Itamar Drechsler & Alexi Savov & Philipp Schnabl, 2018. "A Model of Monetary Policy and Risk Premia," Journal of Finance, American Finance Association, vol. 73(1), pages 317-373, February.
    11. Jochen O. Mierau & Mark Mink, 2018. "A Descriptive Model of Banking and Aggregate Demand," De Economist, Springer, vol. 166(2), pages 207-237, June.
    12. Gary B. Gorton, 2016. "The History and Economics of Safe Assets," NBER Working Papers 22210, National Bureau of Economic Research, Inc.
    13. Hanson, Samuel G. & Shleifer, Andrei & Stein, Jeremy C. & Vishny, Robert W., 2015. "Banks as patient fixed-income investors," Journal of Financial Economics, Elsevier, vol. 117(3), pages 449-469.
    14. Bianco, Antonio, 2015. "Relationship Banking, Shadow Banking, and the Economics of Depression," MPRA Paper 65849, University Library of Munich, Germany.
    15. Tobias Adrian & Adam B. Ashcraft & Nicola Cetorelli, 2013. "Shadow bank monitoring," Staff Reports 638, Federal Reserve Bank of New York.
    16. He, Zhiguo & Kelly, Bryan & Manela, Asaf, 2017. "Intermediary asset pricing: New evidence from many asset classes," Journal of Financial Economics, Elsevier, vol. 126(1), pages 1-35.
    17. Tobias Adrian, 2014. "Financial stability policies for shadow banking," Staff Reports 664, Federal Reserve Bank of New York.
    18. Stefan Arping, 2015. "Banks and Market Liquidity," Tinbergen Institute Discussion Papers 15-020/IV, Tinbergen Institute.
    19. Xavier Giroud & Holger M. Mueller, 2015. "Firm Leverage and Unemployment during the Great Recession," NBER Working Papers 21076, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • 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
    • G01 - Financial Economics - - General - - - Financial Crises
    • 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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