56 Pages Posted: 16 Aug 2013 Last revised: 5 Jan 2017
Date Written: April 29, 2016
We build a macro-finance model of shadow banking: the transformation of risky assets into securities that are money-like in quiet times but become illiquid when uncertainty spikes. Shadow banking economizes on scarce collateral, expanding liquidity provision in booms, boosting asset prices and growth, but also creating fragility. A rise in uncertainty raises shadow-banking spreads, forcing the financial sector to switch to collateral-intensive funding. Shadow banking collapses, liquidity provision shrinks, liquidity premia and discount rates rise, asset prices, investment, and growth fall. The model generates slow recoveries, collateral runs, and flight-to-quality. It sheds light on LSAPs, Operation Twist, and other interventions.
Keywords: Financial intermediation, liquidity transformation, shadow banking, unconventional monetary policy
JEL Classification: E44, E52, G21
Suggested Citation: Suggested Citation
Moreira, Alan and Savov, Alexi, The Macroeconomics of Shadow Banking (April 29, 2016). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2310361 or http://dx.doi.org/10.2139/ssrn.2310361