How does monetary policy respond to the dynamics of the shadow banking sector?

We investigate the response of the central bank to the change in size of non-bank financial intermediaries. Using quarterly data for the U.S. 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 characterisation of the monetary policy reaction function.

• Publication year

  2020

• Venue

  International Journal of Finance & Economics

• Publication date

  2020-04-01

• Fields of study

  Economics

• Identifiers
  DOI 10.1002/ijfe.1748
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• No claims are published for this paper.

• No concepts are published for this paper.

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