On Shadow Banking and Financial Frictions in DSGE Modeling
-
Philipp Kirchner
Abstract
At the forefront of macroeconomic research on the causes of the Great Financial Crisis (GFC) was and still is the usage of dynamic stochastic general equilibrium (DSGE) models. To capture the nonlinearities of the GFC, these models were enriched with a variety of financial frictions. This paper focuses on a special subset of these frictions, the shadow banking system. We provide a structured review of the strand of literature that considers shadow banking in DSGE setups and draw particular attention to the modeling approach as well as impact of shadow banking. Our analysis allows the following conclusions: firstly, models featuring shadow banking are better able to simulate realistic movements in the business cycle that are of comparable magnitude to the GFC. Secondly, the models consider amplification channels between the financial sector and the real economy that proved to be of importance during the crisis. Thirdly, the models display a good explanatory power of financial stability measures in the light of shadow banking.
Acknowledgments
I would like to thank Jochen Michaelis, Benjamin Schwanebeck and an anonymous referee for very helpful suggestions.
References
Acharya, V.V. and Richardson, M. (2009). Causes of the financial crisis. Crit. Rev. 21: 195–210, https://doi.org/10.1080/08913810902952903.Suche in Google Scholar
Acharya, V. V., Schnabl, P., and Suarez, G. (2013). Securitization without risk transfer. J. Financ. Econ. 107: 515–536, https://doi.org/10.1016/j.jfineco.2012.09.004.Suche in Google Scholar
Adrian, T. and Ashcraft, A. B. (2012). Shadow banking regulation. Annu. Rev. Financial Econ. 4: 99–140, https://doi.org/10.1146/annurev-financial-110311-101810.Suche in Google Scholar
Adrian, T., Ashcraft, A. B., and Cetorelli, N. (2013). Shadow bank monitoring, FRB of New York Staff Report 638.10.2139/ssrn.2334918Suche in Google Scholar
Adrian, T. and Jones, B. (2018). Shadow banking and market-based finance. International Monetary Fund, Washington, D.C.10.5089/9781484343883.087Suche in Google Scholar
Adrian, T. and Shin, H. S. (2010). The changing nature of financial intermediation and the financial crisis of 2007–2009. Annu. Rev. Econ. 2: 603–618, https://doi.org/10.1146/annurev.economics.102308.124420.Suche in Google Scholar
Andrés, J. and Arce, O. (2012). Banking competition, housing prices and macroeconomic stability. Econ. J. 122: 1346–1372, https://doi.org/10.1111/j.1468-0297.2012.02531.x.Suche in Google Scholar
Ashcraft, A. B. and Schuermann, T. (2008). Understanding the securitization of subprime mortgage credit. Found. Trends Finance 2: 191–309.10.1561/0500000024Suche in Google Scholar
Beck, T., Chen, T., Lin, C., and Song, F. M. (2016). Financial innovation: the bright and the dark sides. J. Bank. Finance 72: 28–51, https://doi.org/10.1016/j.jbankfin.2016.06.012.Suche in Google Scholar
Bernanke, B. S. (2007). The financial accelerator and the credit channel. No. 296, Board of Governors of the Federal Reserve System (US).Suche in Google Scholar
Bernanke, B. S. (2012). Some reflections on the crisis and the policy response. In: Rethinking finance: perspectives on the crisis conference.Suche in Google Scholar
Bernanke, B. S., Gertler, M., and Gilchrist, S. (1999). The financial accelerator in a quantitative business cycle framework. Handb. Macroecon. 1: 1341–1393, https://doi.org/10.1016/s1574-0048(99)10034-x.Suche in Google Scholar
Calvo, G. (1983). Staggered prices in a utility-maximizing framework. J. Monetary Econ. 12: 383–398, https://doi.org/10.1016/0304-3932(83)90060-0.Suche in Google Scholar
Carlstrom, C. T. and Fuerst, T. S. (1997). Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis. Am. Econ. Rev. 87: 893–910.10.26509/frbc-wp-199602Suche in Google Scholar
Christiano, L. J., Eichenbaum, M., and Evans, C. L. (2005). Nominal rigidities and the dynamic effects of a shock to monetary policy. J. Polit. Econ. 113: 1–45, https://doi.org/10.1086/426038.Suche in Google Scholar
Christiano, L. J., Eichenbaum, M., and Trabandt, M. (2018). On DSGE models. J. Econ. Perspect. 32: 113–40, https://doi.org/10.1257/jep.32.3.113.Suche in Google Scholar
Christiano, L., Motto, R., and Rostagno, M. (2010). Financial frictions in economic fluctuations. ECB Working Paper Series No. 1192/May 2010.Suche in Google Scholar
Claessens, S. and Kose, M. A. (2017). Macroeconomic implications of financial imperfections: a survey, BIS Working Papers No. 677.10.1596/1813-9450-8260Suche in Google Scholar
Coval, Joshua, Jurek, Jakob, and Stafford, Erik (2009). The economics of structured finance. J. Econ. Perspect. 23: 3–25, https://doi.org/10.1016/j.jmoneco.2012.12.001.Suche in Google Scholar
Dedola, L., Peter, K., and Lombardo, G. (2013). Global implications of national unconventional policies. J. Monetary Econ. 60: 66–85, https://doi.org/10.1016/j.jmoneco.2012.12.001.Suche in Google Scholar
Deutsche Bundesbank (2014). The shadow banking system in the euro area: overview and monetary policy implications, Monthly Report.Suche in Google Scholar
Duncan, A. and Nolan, C. (2017). Financial frictions in macroeconomic models, No. 1719. School of Economics Discussion Papers.10.1093/acrefore/9780190625979.013.168Suche in Google Scholar
Fama, E. F. (1970). Efficient capital markets: a review of theory and empirical work. J. Finance 25: 383–417, https://doi.org/10.2307/2325486.Suche in Google Scholar
Fève, P., Moura, A., and Olivier, P. (2019a). Shadow banking and financial regulation: a small-scale DSGE perspective. J. Econ. Dynam. Contr. 101: 130–144, https://doi.org/10.1016/j.jedc.2019.02.001.Suche in Google Scholar
Fève, P., Moura, A., and Olivier, P. (2019b). Shadow banking and the Great Recession: evidence from an estimated DSGE model, Working Paper No. 125, Central Bank of Luxembourg.Suche in Google Scholar
Financial Stability Board (2011). Shadow banking: scoping the issue, A Background Note of the Financial Stability Board April 2011.Suche in Google Scholar
Financial Stability Board (2012). Global shadow banking monitoring report 2012, Financial Stability Board. November 18 2012.Suche in Google Scholar
Financial Stability Board (2019). Global monitoring report on non-bank financial intermediation 2018, Financial Stability Board. February 4 2019.Suche in Google Scholar
Galati, G. and Moessner, R. (2012). Macroprudential policy – a literature review. J. Econ. Surv. 27: 846–878.10.1111/j.1467-6419.2012.00729.xSuche in Google Scholar
Gary, Gorton, Metrick, Andrew, Shleifer, Andrei, and Tarullo, Daniel (2010). Regulating the shadow banking system. Brookings Papers on Economic Activity 261–312.10.1353/eca.2010.0016Suche in Google Scholar
Gebauer, S. and Mazelis, F. (2019). The role of shadow banking for financial regulation. Beiträge zur Jahrestagung des Vereins für Socialpolitik.Suche in Google Scholar
Gerali, A., Neri, S., Sessa, L., and Signoretti, F. M. (2010). Credit and banking in a DSGE model of the euro area. J. Money Credit Bank. 42: 107–141, https://doi.org/10.1111/j.1538-4616.2010.00331.x.Suche in Google Scholar
Gertler, M. and Bernanke, B. (1989). Agency costs, net worth and business fluctuations. In: Business cycle theory. Edward Elgar Publishing Ltd, Cheltenham, UK.Suche in Google Scholar
Gertler, M. and Karadi, P. (2011). A model of unconventional monetary policy. J. Monetary Econ. 58: 17–34, https://doi.org/10.1016/j.jmoneco.2010.10.004.Suche in Google Scholar
Gertler, M. and Kiyotaki, N. (2010). Financial intermediation and credit policy in business cycle analysis. Handb. Monetary Econ. 3: 547–599, https://doi.org/10.1016/b978-0-444-53238-1.00011-9.Suche in Google Scholar
Gertler, M. and Kiyotaki, N. (2015). Banking, liquidity, and bank runs in an infinite horizon economy. Am. Econ. Rev. 105: 2011–2043, https://doi.org/10.1257/aer.20130665.Suche in Google Scholar
Gertler, M., Kiyotaki, N., and Albert, Q. (2012). Financial crises, bank risk exposure and government financial policy. J. Monetary Econ. 59: S17–S34, https://doi.org/10.1016/j.jmoneco.2012.11.007.Suche in Google Scholar
Gertler, M., Kiyotaki, N., and Prestipino, A. (2016). Wholesale banking and bank runs in macroeconomic modeling of financial crises. Handb. Macroecon. 2: 1345–1425, https://doi.org/10.1016/bs.hesmac.2016.03.009.Suche in Google Scholar
Iacoviello, M. (2005). House prices, borrowing constraints, and monetary policy in the business cycle. Am. Econ. Rev. 95: 739–764, https://doi.org/10.1257/0002828054201477.Suche in Google Scholar
Iacoviello, M. (2015). Financial business cycles. Rev. Econ. Dynam. 18: 140–163, https://doi.org/10.1016/j.red.2014.09.003.Suche in Google Scholar
International Monetary Fund (2014). Global financial stability report: risk taking, liquidity, and shadow banking. Curbing excess while promoting growth.Suche in Google Scholar
Käfer, B. (2018). Peer-to-Peer lending – a (financial stability) risk perspective. Rev. Econ. 69: 1–25, https://doi.org/10.1515/roe-2017-0020.Suche in Google Scholar
Kirchner, P. and Schwanebeck, B. (2017). Optimal unconventional monetary policy in the face of shadow banking, MAGKS Joint Discussion Paper Series in Economics, No. 25-2017.Suche in Google Scholar
Kiyotaki, N. and Moore, J. (1997). Credit cycles. J. Polit. Econ. 105: 211–248, https://doi.org/10.1086/262072.Suche in Google Scholar
Kodres, L. E. (2013). What is shadow banking? IMF Finance Dev.Suche in Google Scholar
Mazelis, F. (2016). Implications of shadow bank regulation for monetary policy at the zero lower bound, SFB 649 Discussion Paper, No. 2016-043.Suche in Google Scholar
Meeks, R., Nelson, B., and Alessandri, P. (2017). Shadow banks and macroeconomic instability. J. Money Credit Bank. 49: 1483–1516, https://doi.org/10.1111/jmcb.12422.Suche in Google Scholar
Nelson, B. and Pinter, G. (2018). Macroprudential capital regulation in general equilibrium, Bank of England Staff Working Paper No. 770.10.2139/ssrn.3299001Suche in Google Scholar
Nelson, B., Pinter, G., and Theodoridis, K. (2018). Do contractionary monetary policy shocks expand shadow banking? J. Appl. Econom. 33: 198–211, https://doi.org/10.1002/jae.2594.Suche in Google Scholar
Noeth, B. and Sengupta, R. (2011). Is shadow banking really banking? Reg. Econ. 10: 8–13.Suche in Google Scholar
Paoli, Bianca, and Paustian, Matthias (2017). Coordinating Monetary and Macroprudential Policies. Journal of Money, Credit and Banking 49:(2–3); 319–349.10.1111/jmcb.12381Suche in Google Scholar
Poutineau, J.-C. and Vermandel, G. (2015). Cross-border banking flows spillovers in the Eurozone: evidence from an estimated DSGE model. J. Econ. Dynam. Contr. 51: 378–403, https://doi.org/10.1016/j.jedc.2014.11.006.Suche in Google Scholar
Poutineau, J.-C. and Vermandel, G. (2017). Global banking and the conduct of macroprudential policy in a monetary union. J. Macroecon. 54: 306–331, https://doi.org/10.1016/j.jmacro.2017.04.010.Suche in Google Scholar
Pozsar, Z., Adrian, T., Adam, A., and Boesky, H. (2013). Shadow banking. FRBNY Econ. Policy Rev. 1–16.10.2139/ssrn.1645337Suche in Google Scholar
Quadrini, V. (2011). Financial frictions in macroeconomic fluctuations. FRB Richmond Economic Quarterly 97: 209–254.Suche in Google Scholar
Schwanebeck, B. (2018). Financial frictions and the design of optimal monetary policy. Kassel University Press, Kassel, Germany.Suche in Google Scholar
Smets, F. and Wouters, R. (2003). An estimated dynamic stochastic general equilibrium model of the euro area. J. Eur. Econ. Assoc. 1: 1123–1175, https://doi.org/10.1162/154247603770383415.Suche in Google Scholar
Smets, F., Christoffel, K., Coenen, G., Motto, R., and Rostagno, M. (2010). DSGE models and their use at the ECB. SERIEs 1: 51–65, https://doi.org/10.1007/s13209-010-0020-9.Suche in Google Scholar
Townsend, R. M. (1979). Optimal contracts and competitive markets with costly state verification. J. Econ. Theor. 21: 265–293, https://doi.org/10.1016/0022-0531(79)90031-0.Suche in Google Scholar
Unger, R. (2016). Traditional banks, shadow banks and the US credit boom: Credit origination versus financing, Deutsche Bundesbank Discussion Paper 11/2016.10.2139/ssrn.2797081Suche in Google Scholar
Verona, F., Manuel, M., Martins, F., and Drumond, I. (2013). (Un)anticipated monetary policy in a DSGE model with a shadow banking system. Int. J. Cent. Bank. 9: 78–124.10.2139/ssrn.2256278Suche in Google Scholar
© 2020 Walter de Gruyter GmbH, Berlin/Boston
