Do contractionary monetary policy shocks expand shadow banking?

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 16 January 2015

Working Paper No. 521
By Benjamin Nelson, Gabor Pinter and Konstantinos Theodoridis

Using vector autoregressive models with either constant or time-varying parameters and stochastic volatility for the United States, we find that a contractionary monetary policy shock has a persistent negative impact on the asset growth of commercial banks, but increases the asset growth of shadow banks and securitisation activity. To explain this ‘waterbed’ effect, we propose a standard New Keynesian model featuring both commercial and shadow banking, and we show that the model comes close to explaining the empirical results. Our findings cast doubt on the idea that monetary policy can usefully ‘get in all the cracks’ of the financial sector in a uniform way.

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