How does monetary policy respond to the dynamics of the shadow banking sector?

Luca Agnello, Vitor Castro, Fredj Jawadi and Ricardo Sousa

International Journal of Finance & Economics, 2020, vol. 25, issue 2, 228-247

Abstract: We investigate the response of the central bank to the change in size of nonbank financial intermediaries. Using quarterly data for the United States over the period 1946:Q1‐2016Q4, we find that when faced with an increase in the asset growth of the securities' brokers and dealers and the shadow banking sector, the monetary authority reacts by raising the short‐term nominal interest rate. This response is stronger in the case of sharp variation in the size of the balance sheet of nonbank financial intermediaries. From a policy perspective, our study suggests that an extended version of the original Taylor rule—embedding both price stability and financial stability concerns—provides a good characterization of the monetary policy reaction function.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:wly:ijfiec:v:25:y:2020:i:2:p:228-247

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