Monetary Transmission through Shadow Banks

58 Pages Posted: 1 Apr 2019

See all articles by Kairong Xiao

Kairong Xiao

Columbia University - Columbia Business School

Multiple version iconThere are 2 versions of this paper

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

Xiao, Kairong, Monetary Transmission through Shadow Banks (March 7, 2019). 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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