Monetary Transmission through Shadow Banks

57 Pages Posted: 21 Apr 2018

See all articles by Kairong Xiao

Kairong Xiao

Columbia University - Columbia Business School

Multiple version iconThere are 2 versions of this paper

Date Written: April 20, 2018


I find that shadow bank money creation significantly expands during monetary tightening. This "shadow money channel" offsets the reductions in commercial bank deposits and dampens the impact of monetary policy. Using a structural model of bank competition, I show that heterogeneous depositor clientele quantitatively explains the difference in monetary transmission between commercial and shadow banks. Facing more yield-sensitive clientele, shadow banks pass through more rate hikes to depositors, thereby attract more deposits when the Fed raises rates. My results suggest that monetary tightening may unintentionally drive deposits into the uninsured shadow banking sector, amplifying the risk of bank runs.

Keywords: Monetary Policy, Shadow Banks, Deposit Competition

JEL Classification: G23, E52

Suggested Citation

Xiao, Kairong, Monetary Transmission through Shadow Banks (April 20, 2018). Available at SSRN: or

Kairong Xiao (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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