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The connection between Wall Street and Main Street : measurement and implications for monetary policy

  • Barattieri, Alessandro
  • Eden, Maya
  • Stevanovi, Dalibor

This paper proposes a measure of the extent to which a financial sector is connected to the real economy. The Measure of Connectedness is a measure of the composition of assets, namely the share of credit to the non-financial sectors over the total credit market instruments. The aggregate Measure of Connectedness for the United States declines by about 27 percent in the period 1952-2009. The authors suggest that this increase in disconnectedness between the financial sector and the real economy may have dampened the sensitivity of the real economy to monetary shocks. They present a stylized model that illustrates how interbank trading can reduce the sensitivity of lending to the entrepreneur's net worth, thereby dampening the credit channel transmission of monetary policy. The Measure of Connectedness is interacted with both a structural vector autoregressive model and a factor-augmented vector autoregressive model for the United States economy. The analysis establishes that the impulse responses to monetary policy shocks are dampened as the level of connection declines.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6667.

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Date of creation: 01 Oct 2013
Date of revision:
Handle: RePEc:wbk:wbrwps:6667
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  1. Philippon, Thomas & Reshef, Ariell, 2009. "Wages and Human Capital in the U.S. Financial Industry: 1909-2006," CEPR Discussion Papers 7282, C.E.P.R. Discussion Papers.
  2. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  3. Boivin, Jean & Kiley, Michael T. & Mishkin, Frederic S., 2010. "How Has the Monetary Transmission Mechanism Evolved Over Time?," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 8, pages 369-422 Elsevier.
  4. Francis X. Diebold & Kamil Yilmaz, 2011. "On the Network Topology of Variance Decompositions: Measuring the Connectedness of Financial Firms," Koç University-TUSIAD Economic Research Forum Working Papers 1124, Koc University-TUSIAD Economic Research Forum.
  5. Valentina Bruno & Hyun Song Shin, 2012. "Capital Flows and the Risk-Taking Channel of Monetary Policy," BIS Working Papers 400, Bank for International Settlements.
  6. Gennaioli, Nicola & Shleifer, Andrei & Vishny, Robert, 2014. "Finance and the Preservation of Wealth," CEPR Discussion Papers 9890, C.E.P.R. Discussion Papers.
  7. Mésonnier, J-S. & Stevanovic, D., 2012. "Bank leverage shocks and the macroeconomy: a new look in a data-rich environment," Working papers 394, Banque de France.
  8. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
  9. Diebold, Francis X. & Yilmaz, Kamil, 2012. "Better to give than to receive: Predictive directional measurement of volatility spillovers," International Journal of Forecasting, Elsevier, vol. 28(1), pages 57-66.
  10. Karen E. Dynan & Douglas W. Elmendorf & Daniel E. Sichel, 2005. "Can financial innovation help to explain the reduced volatility of economic activity?," Finance and Economics Discussion Series 2005-54, Board of Governors of the Federal Reserve System (U.S.).
  11. Altunbas, Yener & Gambacorta, Leonardo & Marques-Ibanez, David, 2009. "Securitisation and the bank lending channel," European Economic Review, Elsevier, vol. 53(8), pages 996-1009, November.
  12. repec:oup:qjecon:v:125:y:2010:i:1:p:307-362 is not listed on IDEAS
  13. Thomas Philippon & Ariell Reshef, 2013. "An International Look at the Growth of Modern Finance," Journal of Economic Perspectives, American Economic Association, vol. 27(2), pages 73-96, Spring.
  14. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 236-251.
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