Working paper

Financial Regulation and Shadow Banking

A Small-Scale DSGE Perspective

Patrick Fève, and Olivier Pierrard

Abstract

In this paper, we revisit the role of regulation in a small-scale dynamic stochastic general equilibrium (DSGE) model with interacting traditional and shadow banks. We estimate the model on US data and we show that shadow banking interferes with macro-prudential policies. More precisely, asymmetric regulation causes a leak towards shadow banking which weakens the expected stabilizing effect. A counterfactual experiment shows that a regulation of the whole banking sector would have reduced investment fluctuations by 10% between 2005 and 2015. Our results therefore suggest to base regulation on the economic functions of financial institutions rather than on their legal forms.

Keywords

Shadow Banking; DSGE models; Macro-prudential Policy;

JEL codes

  • C32: Time-Series Models • Dynamic Quantile Regressions • Dynamic Treatment Effect Models • Diffusion Processes
  • E32: Business Fluctuations • Cycles

Reference

Patrick Fève, and Olivier Pierrard, Financial Regulation and Shadow Banking: A Small-Scale DSGE Perspective, TSE Working Paper, n. 17-829, July 2017.

See also

Published in

TSE Working Paper, n. 17-829, July 2017