The Macroeconomic Effects of Shadow Banking Panics

Johannes Poeschl

The B.E. Journal of Macroeconomics, 2023, vol. 23, issue 2, 711-752

Abstract: We study the interaction between occasionally binding financial constraints in the traditional (retail) banking sector and banking panics in the shadow banking sector. Shadow banking panics occur when retail banks choose not to roll over their lending to shadow banks. Occasionally binding financial constraints of retail banks increase the likelihood of and amplify boom-bust dynamics around such shadow banking panics. The model can quantitatively match the dynamics of macroeconomic and financial variables around the US financial crisis. We quantify the impact of wholesale funding market interventions akin to those implemented by the Federal Reserve in 2008, finding that they reduced the fall in output by about half a percentage point. The timing of this intervention matters: an intervention before the banking panic would have been more effective and might even have avoided the panic.

Keywords: banking panics; shadow banks; wholesale funding market; liquidity backstops (search for similar items in EconPapers)
JEL-codes: E44 G24 G28 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1515/bejm-2022-0067

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