Shadow banking and the design of macroprudential policy in a monetary union

Philipp Kirchner () and Benjamin Schwanebeck
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Philipp Kirchner: University of Kassel

MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: This paper studies the interaction of international shadow banking with monetary and macroprudential policy in a two-country currency union DSGE model. We fiÂ…nd evidence that cross-country fiÂ…nancial integration through the shadow banking system is a source of fiÂ…nancial contagion in response to idiosyncratic real and fiÂ…nancial shocks due to harmonization of fiÂ…nancial spheres. The resulting high degree of business cycle synchronization across countries, especially for Â…financial variables, makes union-wide policy tools more ffective. Nevertheless, optimal monetary policy at the union-level is too blunt an instrument to adequately stabilize business cycle downturns and needs to be accompanied by macroprudential regulation. Our welfare analysis reveals that the gains from the availability of country-speciÂ…c prudential tools vanish with the degree of fiÂ…nancial integration as union-wide macroprudential regulation is able to effectively reduce losses among the union members.

Keywords: fiÂ…nancial frictions; shadow banking; currency union; Â…financial integration; macroprudential policy (search for similar items in EconPapers)
JEL-codes: E32 E44 E58 F45 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2020
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:mar:magkse:202024

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