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 (3)

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

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