The Demand for Banking and Shadow Banking Services

Forthcoming in North American Journal of Economics and Finance

30 Pages Posted: 28 Dec 2018

See all articles by Apostolos Serletis

Apostolos Serletis

University of Calgary - Department of Economics

Libo Xu

University of San Francisco - Department of Economics

Date Written: December 11, 2018

Abstract

We explore the hypothesis that the substitutability/complementarity relationship between banking and shadow banking services is a major factor affecting the transmission mechanism of monetary policy. We take the parametric approach to demand analysis, which allows estimation and testing in a systems-of-equations context, and use the Minflex Laurent flexible functional form for the underlying aggregator function. We relax the homoskedasticity assumption and assume Markov regime switching to relax the assumption of fixed consumer preferences. We generate inference consistent with neoclassical microeconomic theory and provide evidence against simple-sum money supply measures. We also show that the emergence of shadow banking has increased the stability of money demand functions. This means that money supply measures based on a nonlinear aggregator function might be a better measure of the stance of monetary policy than the interest rate.

Keywords: Minflex Laurent Functional Form; Markov Regime Switching; GARCH; BEKK; Volatility Impulse Response Functions

JEL Classification: C3; C13; C51; E41; E42; E51

Suggested Citation

Serletis, Apostolos and Xu, Libo, The Demand for Banking and Shadow Banking Services (December 11, 2018). Forthcoming in North American Journal of Economics and Finance. Available at SSRN: https://ssrn.com/abstract=3299697 or http://dx.doi.org/10.2139/ssrn.3299697

Apostolos Serletis (Contact Author)

University of Calgary - Department of Economics ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada
403 220-4091 (Phone)
403 282-5262 (Fax)

Libo Xu

University of San Francisco - Department of Economics ( email )

2130 Fulton Street
San Francisco, CA 94117-1080
United States

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