Do Contractionary Monetary Policy Shocks Expand Shadow Banking?

Nelson, Benjamin; Pintér, Gábor; Theodoridis, Konstantinos

doi:10.2139/ssrn.2550820

Cited by 26 publications

(54 citation statements)

References 49 publications

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“…As can be seen in Figure , a contractionary interest rate shock has no significant impact on broker–dealer leverage and stock prices, evidence against a supply of leverage shock. This finding is consistent with Nelson et al () who find that the contribution of monetary policy shocks on asset growth in the financial sector as a whole has been small.…”

Section: Identification With Sign Restrictionssupporting

confidence: 92%

“…Our results, on the basis of quarterly data over the period 1967:1–2014:3, show that monetary policy and broker–dealer leverage shocks produce responses consistent with a priori expectations about the macroeconomic effects of monetary policy and broker–dealer leverage. They are consistent with those reported by Nelson, Pinter, and Theodoridis () in the context of a sign‐restricted VAR. Our results also show that broker–dealer leverage shocks can significantly affect stock prices, thus supporting the theoretical model of Adrian et al().…”

Section: Introductionsupporting

confidence: 91%

“…We also address the simultaneity problem of identifying monetary policy and leverage shocks by using a combination of short‐run and long‐run restrictions and also use sign restrictions to check the robustness of the results. Nelson et al() also use a VAR model to examine the effects of monetary policy on the asset growth of commercial banks, shadow banks, and securitisation activity. However, they do not apply theory‐based short‐run and long‐run restrictions in their model, and they do not investigate the interdependence between monetary policy and broker–dealer leverage, as we do in this paper.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Monetary policy and leverage shocks

Istiak

Serletis

2017

Int. J. Fin. Econ.

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The current mainstream approach to monetary policy in the United States is based on the new Keynesian model and is expressed in terms of the federal funds rate. It ignores the role of financial intermediary leverage (or collateral rates). But as the federal funds rate has reached the zero lower bound, the issue is whether there is a useful role of leverage in monetary policy and business cycle analysis. Motivated by these considerations and by recent financial intermediary asset pricing theories in this paper, we investigate the macroeconomic effects of broker-dealer leverage and the interdependence between monetary policy and broker-dealer leverage in the context of a structural vector autoregression model, using quarterly U.S. data over the period from 1967:1 to 2014:3. We address the simultaneity problem of identifying monetary policy and leverage shocks by using a combination of short-run and long-run restrictions. We also use the sign restriction approach to the identification of shocks to distinguish between leverage supply and leverage demand shocks, as one would expect the macroeconomic effects of these two types of leverage shocks to be quite different. Our results show that monetary policy and broker-dealer leverage demand shocks produce results that capture reasonable macroeconomic dynamics.

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Section: Identification With Sign Restrictionssupporting

confidence: 92%

Section: Introductionsupporting

confidence: 91%

Section: Introductionmentioning

confidence: 99%

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Monetary policy and leverage shocks

Istiak

Serletis

2017

Int. J. Fin. Econ.

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“…Begenau and Landvoigt (2017) and Moreira and Savov (2017) are focused on modeling shadow banks that introduce financial fragility into the macroeconomy in the form of run risk or liquidity crunches, respectively. Gertler et al (2016); Meeks et al (2017); Nelson et al (2017); Fève and Pierrard (2017) focus on the wholesale funding aspect of shadow banks. The shadow banks are either modeled as borrowing funds primarily from retail banks funded by the households as in Gertler et al (2016), or as securitizers of bank loans that relax regulatory constraints on commercial banks as in Meeks et al (2017); Nelson et al (2017); Fève and Pierrard (2017).…”

mentioning

confidence: 99%

“…Gertler et al (2016); Meeks et al (2017); Nelson et al (2017); Fève and Pierrard (2017) focus on the wholesale funding aspect of shadow banks. The shadow banks are either modeled as borrowing funds primarily from retail banks funded by the households as in Gertler et al (2016), or as securitizers of bank loans that relax regulatory constraints on commercial banks as in Meeks et al (2017); Nelson et al (2017); Fève and Pierrard (2017). Mendicino et al (2018) studies the optimal dynamic capital requirements in a model that allows for bank lending and direct household financing of investment.…”

mentioning

confidence: 99%

Understanding Bank and Nonbank Credit Cycles: A Structural Exploration

Durdu

Zhong

2019

FEDS

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We explore the structural drivers of bank and nonbank credit cycles using an estimated medium-scale macro model that allows for bank and nonbank financial intermediation. We posit economy-wide aggregate and sectoral disturbances to potentially drive bank and nonbank credit growth. We find that sectoral shocks affecting the balance sheets of entrepreneurs who borrow from the financial sector are important for the business cycle frequency fluctuations in bank and nonbank credit growth. Economy-wide entrepreneurial risk shocks gain predominance for explaining the longer-horizon comovement between the two series.JEL Classification: E3, E44, G01, G21

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How does monetary policy respond to the dynamics of the shadow banking sector?

et al. 2019

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We investigate the response of the central bank to the change in size of nonbank financial intermediaries. Using quarterly data for the United States over the period 1946:Q1‐2016Q4, we find that when faced with an increase in the asset growth of the securities' brokers and dealers and the shadow banking sector, the monetary authority reacts by raising the short‐term nominal interest rate. This response is stronger in the case of sharp variation in the size of the balance sheet of nonbank financial intermediaries. From a policy perspective, our study suggests that an extended version of the original Taylor rule—embedding both price stability and financial stability concerns—provides a good characterization of the monetary policy reaction function.

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Do Contractionary Monetary Policy Shocks Expand Shadow Banking?

Cited by 26 publications

References 49 publications

Monetary policy and leverage shocks

Monetary policy and leverage shocks

Understanding Bank and Nonbank Credit Cycles: A Structural Exploration

How does monetary policy respond to the dynamics of the shadow banking sector?

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