The Macroeconomics of Shadow Banking

Alexi Savov and Alan Moreira
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Alan Moreira: Yale University

No 254, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: We build a macroeconomic model of financial intermediation in which intermediaries issue equity without friction. In normal times, they maximize liquidity creation by levering up the collateral value of their assets, a process we call shadow banking. A rise in uncertainty causes investors to demand liquidity in bad states, which forces intermediaries to delever and substitute toward safe liabilities; shadow banking shuts down, prices and investment fall. The model produces slow economic recoveries, especially when intermediaries are highly-capitalized. It features collateral runs and flight to quality, and it provides a framework for analyzing unconventional monetary policy and regulatory reform proposals.

Date: 2014
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
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Citations: View citations in EconPapers (24)

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Working Paper: The Macroeconomics of Shadow Banking (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed014:254

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