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Financial Regulation and Shadow Banking: A Small-Scale DSGE Perspective

Patrick Fève and Olivier Pierrard ()

No 111, BCL working papers from Central Bank of Luxembourg

Abstract: In this paper, we revisit the role of regulation in a small-scale dynamic stochastic general equilibrium (DSGE) model with interacting traditional and shadow banks. We estimate the model on US data and we show that shadow banking interferes with macro-prudential policies. More precisely, asymmetric regulation causes a leak towards shadow banking which weakens the expected stabilizing effect. A counterfactual experiment shows that a regulation of the whole banking sector would have reduced investment fluctuations by 10% between 2005 and 2015. Our results therefore suggest to base regulation on the economic functions of financial institutions rather than on their legal forms.

Keywords: Shadow Banking; DSGE models; Macro-prudential Policy (search for similar items in EconPapers)
JEL-codes: C32 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
Date: 2017-07
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Working Paper: Financial Regulation and Shadow Banking: A Small-Scale DSGE Perspective (2018) Downloads
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