On the Macroeconomic Effects of Shadow Banking Development

Georgios Magkonis, Eun Young Oh and Shuonan Zhang
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Eun Young Oh: University of Portsmouth

No 2022-06, Working Papers in Economics & Finance from University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group

Abstract: We build and estimate a dynamic stochastic general equilibrium model with risky innovation and shadow credits to study the macroeconomic implications of shadow banking (SB), particularly on productivity. Our analysis is motivated by negative relationships between SB development and innovation outcome or total factor productivity (TFP) growth. In our model, information asymmetry associated with technology utilization leads to an agency problem in which shadow intermediation reduces banks’ incentives to screen project quality. An SB boom crowd-out traditional financial services, decreases inno- vation quality and technology efficiency, and thereby reduces TFP. In the light of model mechanisms, we analyse cross-country differences and deliver important implications of SB. SB development mainly driven by financial factors (e.g., the US case) leads to significant loss on TFP while that relatively prompted by real-sided factors (e.g., China and the EA cases), could be less harmful.

Keywords: Shadow Banking; Total Factor Productivity; Endogenous Growth; Financial Development; Bayesian Methods (search for similar items in EconPapers)
JEL-codes: C32 E32 O40 (search for similar items in EconPapers)
Pages: 36
Date: 2022-07-06
New Economics Papers: this item is included in nep-ban, nep-dem, nep-dge, nep-fdg and nep-mac
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