Canadian Shadow Banks and Monetary Policy Effectiveness

Jeremy Kronick and Yan Wendy Wu

Canadian Public Policy, 2024, vol. 50, issue 1, 108-126

Abstract: Shadow banks, such as investment funds, hedge funds, and mortgage finance companies, have grown rapidly in recent years. We analyze the link between monetary policy and the growth of shadow banks and, by extension, financial stability in Canada. Using monthly financial market data from 1991 to 2015, we first find that contractionary monetary policy does not cause the expected reduction in shadow bank business loans and mortgage loans as it does in chartered bank credit. This suggests that as shadow banks have grown in importance, the effectiveness of monetary policy in reducing inflation has been impaired. We find evidence to support that hypothesis using a two-stage time-varying coefficient Bayesian vector autoregression approach.

Keywords: monetary policy; shadow banks; effectiveness; mortgage; business loans; monetary transmission (search for similar items in EconPapers)
JEL-codes: E52 G21 G23 (search for similar items in EconPapers)
Date: 2024
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