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Retirement in the Shadow (Banking)

Author

Listed:
  • Facundo Piguillem

    (EIEF)

  • Guillermo Ordonez

    (University of Pennsylvania)

Abstract

We analyze the aggregate implications of the increase in life expectancy with the emergence of shadow banking. We consider a standard overlapping generations economy with neoclassical technology. Agents live and work with certainty for the first part of their life and then retire and can die with constant probability. Since after retirement agents cannot work and have an uncertain life span, they buy insurance during their working life in the form of equity or annuities. These financial instruments are provided by a financial intermediary with CRS technology. The intermediation cost has two main components, a constant cost per unit of loan and a liquidity cost. We show that since 1990 there has been a large decrease in the borrowing and lending interest rate spread, and that almost all of it is due to the fall in the liquidity cost attributed to emergence of shadow banking. At the same time, life expectancy has increased substantially from 74 years in 1980 to around 79 years. We calibrate the model economy to replicate the level of financial intermediation in 1980 and then introduce the observed changes in the liquidity cost and life expectancy. The model generates the same increase in the quantities intermediated and changes in prices as observed in the data. Neither the decrease in the liquidity cost or the change in life expectancy alone account for the observed changes.

Suggested Citation

  • Facundo Piguillem & Guillermo Ordonez, 2015. "Retirement in the Shadow (Banking)," 2015 Meeting Papers 1200, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:1200
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    References listed on IDEAS

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    1. Andreas Fagereng & Charles Gottlieb & Luigi Guiso, 2017. "Asset Market Participation and Portfolio Choice over the Life-Cycle," Journal of Finance, American Finance Association, vol. 72(2), pages 705-750, April.
    2. Bertaut, Carol & DeMarco, Laurie Pounder & Kamin, Steven & Tryon, Ralph, 2012. "ABS inflows to the United States and the global financial crisis," Journal of International Economics, Elsevier, vol. 88(2), pages 219-234.
    3. Lee Lockwood, 2012. "Bequest Motives and the Annuity Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 226-243, April.
    4. Tyler Atkinson & David Luttrell & Harvey Rosenblum, 2013. "How bad was it? The costs and consequences of the 2007–09 financial crisis," Staff Papers, Federal Reserve Bank of Dallas, issue Jul.
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    Cited by:

    1. Ari, Anil & Darracq Pariès, Matthieu & Kok, Christoffer & Żochowski, Dawid, 2016. "When shadows grow longer: shadow banking with endogenous entry," Working Paper Series 1943, European Central Bank.

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