Lighting the shadows: central bank policy transmission through banks and non-banks

Nicolò Bandera, Kristina Bluwstein, Michael Kumhof, Mauricio Salgado-Moreno and Jacob Stevens
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Nicolò Bandera: Bank of England and Centre for Macroeconomics
Kristina Bluwstein: Bank of England
Michael Kumhof: Centre for Macroeconomics
Mauricio Salgado-Moreno: Bank of England
Jacob Stevens: Bank of England

No 1212, Bank of England Staff Working Paper series from Bank of England

Abstract: Non-bank financial institutions (NBFIs) account for an increasingly large share of credit provision and play a central role in quantitative easing (QE). We develop a DSGE model with banks, NBFIs and a central bank interacting through wholesale deposits, bonds and reserve markets to study how monetary transmission changes as the size of NBFIs expands. We estimate the model on UK data to evaluate key parameters in the financial sector. We find that the transmission of conventional interest rate policy to output and inflation is essentially unaffected by the size of the NBFI sector. Conversely, the transmission of QE is strongly altered by the size of the NBFI sector and the source of its expansion. When the NBFI sector expands due to firm funding preferences, this amplifies QE. When it expands due to an increased cost of obtaining bank finance, transmission is largely unchanged. The results underscore that monetary policymakers retain rate control regardless of financial structure, but that the effectiveness of balance sheet policies depends on the composition and behaviour of the non-bank sector.

Keywords: Monetary policy tools; QE; reserves; NBFIs; DSGE estimation (search for similar items in EconPapers)
JEL-codes: C13 E51 E52 E58 G23 (search for similar items in EconPapers)
Pages: 79
Date: 2026-10-23
New Economics Papers: this item is included in nep-mon
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