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The Role of Nonbank Financial Institutions in the Monetary Transmission Mechanism: Theory and Evidence

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  • Sung-Eun Yu

Abstract

Nonbank financial institutions (NBFIs) have substantially increased their market share since 1980s. In spite of the growing importance of NBFIs, they have received much less attention in the monetary transmission mechanism. This paper examines if monetary policy affects NBFIs in the similar way as banks. First, I theoretically explain how monetary policy influences the loan supply of all financial intermediaries (banks and NBFIs) through changes in their net worth. Then, I empirically test whether these two kinds of lending institutions decrease their net worth and the intermediated loans in response to a tight monetary shock. I find that, at the statistically significant level, NBFIs shrink their net worth and a type of loan, especially C&I loans?but not all types of loans decrease, as predicted?in the same way as banks. In particular, NBFIs� C&I loans �decrease� substantially in the beginning periods; however, NBFIs� mortgages and consumer credit �increase� in the middle periods, showing a statistically significant level. These evidences suggest that the theoretical explanation is, at least, consistent with the evidence of C&I loans?but not mortgages and consumer loans. One possible explanation is that, while banks reject mortgages and consumer loans, NBFIs may increase mortgages and consumer loans by picking up the demand for these two types of loans.

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  • Sung-Eun Yu, 2017. "The Role of Nonbank Financial Institutions in the Monetary Transmission Mechanism: Theory and Evidence," Working Paper Series, Department of Economics, University of Utah 2017_04, University of Utah, Department of Economics.
  • Handle: RePEc:uta:papers:2017_04
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    References listed on IDEAS

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    1. Jayaratne, Jith & Morgan, Donald P, 2000. "Capital Market Frictions and Deposit Constraints at Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 74-92, February.
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    9. Billett, Matthew T & Flannery, Mark J & Garfinkel, Jon A, 1995. " The Effect of Lender Identity on a Borrowing Firm's Equity Return," Journal of Finance, American Finance Association, vol. 50(2), pages 699-718, June.
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    More about this item

    Keywords

    monetary policy; nonbank financial institutions; net worth; loan supply JEL Classification: E51; E52; E58;

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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