How Shadow Banks Impact Monetary Policy Effectiveness
35 Pages Posted: 19 Sep 2019 Last revised: 14 Mar 2020
Date Written: March 6, 2020
We analyze the link between monetary policy and the growth of shadow banks, and by extension, financial stability in Canada. Using monthly financial market data from 1991-2015 in a two-stage time-varying coefficient Bayesian vector autoregression approach, we find that greater shares of shadow bank deposits and business loans reduce the effectiveness of monetary policy. Further investigations indicate that these drags are the result of deposits and credit shifting between shadow banks and traditional banks. We also find that contractionary monetary policy increases financial instability by shifting household mortgage loans and business loans from chartered banks to shadow banks.
Keywords: monetary policy, shadow banks, non-bank, financial intermediaries, effectiveness, mortgage, business loans, deposits, Canada, monetary transmission
JEL Classification: E52, G21, G23
Suggested Citation: Suggested Citation