The Macroeconomics of Shadow Banking

NBER Working Paper No. 20335

Issued in July 2014

NBER Program(s):Asset Pricing, Economic Fluctuations and Growth, Monetary Economics



We build a macroeconomic model that centers on liquidity transformation in the financial sector. Intermediaries maximize liquidity creation by issuing securities that are money-like in normal times but become illiquid in a crash when collateral is scarce. We call this process shadow banking. A rise in uncertainty raises demand for crash-proof liquidity, forcing intermediaries to delever and substitute toward safe, collateral- intensive liabilities. Shadow banking shrinks, causing the liquidity supply to contract, discount rates and collateral premia spike, prices and investment fall. The model produces slow recoveries, collateral runs, and flight to quality and it provides a framework for analyzing unconventional monetary policy and regulatory reform proposals.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w20335

Published: ALAN MOREIRA & ALEXI SAVOV, 2017. "The Macroeconomics of Shadow Banking," The Journal of Finance, vol 72(6), pages 2381-2432.

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