How does monetary policy respond to the dynamics of the shadow banking sector?. (14th November 2019)

• Record Type: Journal Article
• Authors: Agnello, Luca; Castro, Vitor; Jawadi, Fredj; Sousa, Ricardo M.
• Is Part Of: International journal of finance & economics. Volume 25:Number 2(2020:Apr.)
• Page Start: 228
• Page End: 247
• Publication Date: 2019-11-14
• Subjects: asset growth -- inflation -- monetary policy -- nonbank financial intermediaries -- shadow banking -- Taylor rule; International finance -- Periodicals; Economics -- Periodicals; 332
• DOI: 10.1002/ijfe.1748
• Languages: English
• ISSNs: 1076-9307

Abstract

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.