Shadow Banks and Macroeconomic Instability

61 Pages Posted: 16 Dec 2013

Multiple version iconThere are 3 versions of this paper

Date Written: December 2013

Abstract

We develop a macroeconomic model in which commercial banks can offload risky loans to a ‘shadow’ banking sector, and financial intermediaries trade in securitized assets. We analyze 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, stabilization policy aimed solely at the securitization markets is relatively ineffective.

Suggested Citation

Meeks, Roland and Nelson, Benjamin and Alessandri, Piergiorgio, Shadow Banks and Macroeconomic Instability (December 2013). Available at SSRN: https://ssrn.com/abstract=2368038 or http://dx.doi.org/10.2139/ssrn.2368038

Roland Meeks (Contact Author)

University of Essex ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

HOME PAGE: http://www.essex.ac.uk/economics/

Benjamin Nelson

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Piergiorgio Alessandri

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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