The connection between Wall Street and Main Street: measurement and implications for monetary policy

Alessandro Barattieri, Maya Eden () and Dalibor Stevanovi
Authors registered in the RePEc Author Service: Dalibor Stevanovic

No 6667, Policy Research Working Paper Series from The World Bank

Abstract: This paper proposes a measure of the extent to which a financial sector is connected to the real economy. The Measure of Connectedness is a measure of the composition of assets, namely the share of credit to the non-financial sectors over the total credit market instruments. The aggregate Measure of Connectedness for the United States declines by about 27 percent in the period 1952-2009. The authors suggest that this increase in disconnectedness between the financial sector and the real economy may have dampened the sensitivity of the real economy to monetary shocks. They present a stylized model that illustrates how interbank trading can reduce the sensitivity of lending to the entrepreneur's net worth, thereby dampening the credit channel transmission of monetary policy. The Measure of Connectedness is interacted with both a structural vector autoregressive model and a factor-augmented vector autoregressive model for the United States economy. The analysis establishes that the impulse responses to monetary policy shocks are dampened as the level of connection declines.

Keywords: Debt Markets; Access to Finance; Emerging Markets; Financial Intermediation; Economic Theory&Research (search for similar items in EconPapers)
Date: 2013-10-01
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: The Connection between Wall Street and Main Street: Measurement and Implications for Monetary Policy (2013)
Working Paper: The Connection between Wall Street and Main Street: Measurement and Implications for Monetary Policy (2013)
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