Monetary policy shocks in a DSGE model with a shadow banking system

Fabio Verona, Manuel Martins and Ines Drumond ()

CEF.UP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

Abstract: This paper is motivated by the recent financial crisis and addresses whether a “too low for too long” interest rate policy may generate a boom-bust cycle. We suggest a model in which a microfounded shadow banking sector is included in an otherwise state-of-the-art DSGE model. When faced with perverse incentives, financial intermediaries within the shadow banking sector can divert a fraction of stockholders’ profits for their own benefits and extend credit at a discounted rate. The model predicts that long periods of accommodative monetary policy do create the preconditions for, but do not cause per se, a boom-bust cycle. Rather, it is the combination of a persistent monetary ease with microeconomic distortions in the financial system that causes a boom-bust.

Keywords: monetary policy; DSGE model; shadow banking system; boom-bust (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 G24 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2011-02
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cis, nep-dge, nep-mac, nep-mic and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.fep.up.pt/investigacao/cef.up/WP/2011/2011_01_wp.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.fep.up.pt/investigacao/cef.up/WP/2011/2011_01_wp.pdf [302 Found]--> https://fep.up.pt/investigacao/cef.up/WP/2011/2011_01_wp.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:por:cetedp:1101

Access Statistics for this paper

More papers in CEF.UP Working Papers from Universidade do Porto, Faculdade de Economia do Porto Contact information at EDIRC.
Bibliographic data for series maintained by Ana Bonanca ().