How Shadow Banks Impact Monetary Policy Effectiveness

35 Pages Posted: 19 Sep 2019 Last revised: 14 Mar 2020

See all articles by Jeremy Kronick

Jeremy Kronick

C.D. Howe Institute

Yan Wendy Wu

Wilfrid Laurier University

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

Kronick, Jeremy and Wu, Yan Wendy, How Shadow Banks Impact Monetary Policy Effectiveness (March 6, 2020). Available at SSRN: or

Jeremy Kronick

C.D. Howe Institute ( email )

67 Yonge St., Suite 300
Toronto, Ontario M5E 1J8

Yan Wendy Wu (Contact Author)

Wilfrid Laurier University ( email )

75 University Ave W
Waterloo, Ontario N2L 3C5

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