The Macroeconomics of Shadow Banking

56 Pages Posted: 28 Jul 2014

See all articles by Alan Moreira

Alan Moreira

University of Rochester - Simon Business School

Alexi Savov

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2014

Abstract

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.

Suggested Citation

Moreira, Alan and Savov, Alexi, The Macroeconomics of Shadow Banking (July 2014). Available at SSRN: https://ssrn.com/abstract=2472792

Alan Moreira (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Alexi Savov

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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