Working paper

Financial Regulation and Shadow Banking

A Small-Scale DSGE Perspective

Patrick Fève, Alban Moura, and Olivier Pierrard

Abstract

This paper estimates a small-scale DSGE model of the US economy with interacting traditional and shadow banks. We find that shadow banks amplify the transmission of structural shocks by helping escape constraints from traditional intermediaries. We show how this leakage toward shadow entities reduces the ability of macro-prudential policies targeting traditional credit to reduce economic volatility. A counterfactual experiment suggests that a countercyclical capital buffer, if applied only to traditional banks, would have in fact amplified the boom-bust cycle associated with the financial crisis of 2007-2008. On the other hand, a broader regulation scheme targeting both traditional and shadow credit would have helped stabilize the economy.

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

Replaced by

Patrick Fève, Alban Moura, and Olivier Pierrard, Financial Regulation and Shadow Banking: A Small-Scale DSGE Perspective, Journal of Economic Dynamics and Control, vol. 101, April 2019, pp. 130–144.

Reference

Patrick Fève, Alban Moura, and Olivier Pierrard, Financial Regulation and Shadow Banking: A Small-Scale DSGE Perspective, TSE Working Paper, n. 17-829, July 2017, revised August 2018.

See also

Published in

TSE Working Paper, n. 17-829, July 2017, revised August 2018