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The Macroeconomics of Shadow Banking

Author

Listed:
  • Alexi Savov

    (New York University Stern School of Busi)

  • Alan Moreira

    (Yale University)

Abstract

We build a macroeconomic model of financial intermediation in which intermediaries issue equity without friction. In normal times, they maximize liquidity creation by levering up the collateral value of their assets, a process we call shadow banking. A rise in uncertainty causes investors to demand liquidity in bad states, which forces intermediaries to delever and substitute toward safe liabilities; shadow banking shuts down, prices and investment fall. The model produces slow economic recoveries, especially when intermediaries are highly-capitalized. It features collateral runs and flight to quality, and it provides a framework for analyzing unconventional monetary policy and regulatory reform proposals.

Suggested Citation

  • Alexi Savov & Alan Moreira, 2014. "The Macroeconomics of Shadow Banking," 2014 Meeting Papers 254, Society for Economic Dynamics.
  • Handle: RePEc:red:sed014:254
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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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