TSE: shadow banking can reduce macro-prudential policy effectiveness

There seems to be an agreement among both academics and policy makers that limited regulation of non-depository financial institutions, or shadow banks, was one of the major causes of the subprime mortgage crisis and the ensuing Great Recession. As a result, they argue that financial regulation needs to move into a more global, macro-prudential direction. However, most of the macroeconomic modeling of the financial sector only features traditional banking and therefore probably misses some important considerations for regulatory design. In this paper, we revisit the role of regulation in a

In this paper from Toulouse School of Economics, authors Patrick Fève and Olivier Pierrard revisit the role of regulation in a small-scale dynamic stochastic general equilibrium (DSGE) model with interacting traditional and shadow banks. They estimate the model on US data and show that shadow banking can seriously reduce the effectiveness of macro-prudential policies.

Read the full paper

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