Shadow banks and macroeconomic instability

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 28 March 2014

Working Paper No. 487
By Roland Meeks, Benjamin D Nelson and Piergiorgio Alessandri 

We develop a macroeconomic model in which commercial banks can offload risky loans to a ‘shadow’ banking sector, and financial intermediaries trade in securitised assets. We analyse the responses of aggregate activity, credit supply and credit spreads to business cycle and financial shocks. We find that: interactions and spillover effects between financial institutions affect credit dynamics; high leverage in the shadow banking system makes the economy excessively vulnerable to aggregate disturbances; and following a financial shock, stabilisation policy aimed solely at the securitisation markets is relatively ineffective. 

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