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The Role of Shadow Banking in the Monetary Transmission Mechanism and the Business Cycle

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  • Mazelis, Falk

Abstract

This paper investigates the heterogeneous impact of monetary policy shocks on financial intermediaries. I distinguish between traditional banks and shadow banks based on their ability to raise debt and equity funding. The functional form for both intermediaries imposes no constraints ex ante, but a Bayesian estimation of key parameters results in traditional banks having a comparative advantage at raising debt while shadow banks are better at raising equity. In line with empirical observations, shadow bank lending moves in the opposite direction to bank lending following monetary policy shocks, which mitigates aggregate credit responses. The recognition of a distinct shadow banking sector results in an amplified propagation of real shocks and a muted propagation of financial shocks. This identification can help in assessing effects of financial regulation on the economy. A historical shock decomposition highlights the roles of traditional banks and shadow banks in the run-up to the 2008 financial crisis.

Suggested Citation

  • Mazelis, Falk, 2016. "The Role of Shadow Banking in the Monetary Transmission Mechanism and the Business Cycle," VfS Annual Conference 2016 (Augsburg): Demographic Change 145763, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc16:145763
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    Cited by:

    1. Albertazzi, Ugo & Barbiero, Francesca & Marqués-Ibáñez, David & Popov, Alexander & Rodriguez d’Acri, Costanza & Vlassopoulos, Thomas, 2020. "Monetary policy and bank stability: the analytical toolbox reviewed," Working Paper Series 2377, European Central Bank.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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