Monetary policy shocks in a DSGE model with a shadow banking system
This paper is motivated by the recent financial crisis and addresses whether a “too low for too long” interest rate policy may generate a boom-bust cycle. We suggest a model in which a microfounded shadow banking sector is included in an otherwise state-of-the-art DSGE model. When faced with perverse incentives, financial intermediaries within the shadow banking sector can divert a fraction of stockholders’ profits for their own benefits and extend credit at a discounted rate. The model predicts that long periods of accommodative monetary policy do create the preconditions for, but do not cause per se, a boom-bust cycle. Rather, it is the combination of a persistent monetary ease with microeconomic distortions in the financial system that causes a boom-bust.
|Date of creation:||Feb 2011|
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- Javier Andrés & Oscar Arce, 2012.
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- Werner F. M. De Bondt & Richard H. Thaler, 1994. "Financial Decision-Making in Markets and Firms: A Behavioral Perspective," NBER Working Papers 4777, National Bureau of Economic Research, Inc. Full references (including those not matched with items on IDEAS)
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