Monetary Transmission through Shadow Banks
Xiao, Kairong. "Monetary transmission through shadow banks." The Review of Financial Studies 33, no. 6 (2020): 2379-2420.
58 Pages Posted: 1 Apr 2019 Last revised: 14 Aug 2020
Date Written: March 7, 2019
I find that shadow bank money creation significantly expands during monetary tightening cycles. This “shadow banking channel” offsets reductions in commercial bank deposits and dampens the impact of monetary policy. Using a structural model of bank competition, I show that the difference in depositor clientéles between commercial and shadow banks quantitatively explains their different responses to monetary policy. Facing a more yield-sensitive clientéle, shadow banks pass through more rate hikes to depositors, thereby attracting more deposits when the Federal Reserve raises rates. My results suggest that monetary tightening could unintentionally increase financial fragility by driving deposits into the uninsured shadow banking sector.
Keywords: Monetary policy, shadow banks
JEL Classification: G23, E52
Suggested Citation: Suggested Citation