Exploring the Dynamic Relationship in the Shadow Banking System

Abstract

In this paper, we study the dynamic relationship in the shadow banking system by examining the short-run and the long-run relationship among the financial assets of the money market fund, the commercial paper, and the repurchase agreement market. The evidence suggests that there exists a common long-term cointegrating trend among these three components of the shadow banking system for 1985-2013 sample period. Any disequilibrium in this long-run relationship among these variables is corrected by movement in the financial assets of the money market funds. The trend-cycle decomposition from the estimated cointegrating relationship shows that the cyclical component in the money market funds is large and captures the huge swings in these markets during the financial crisis. Our results are also robust to the exclusion of the financial crisis, and it reveals the changing role of the commercial paper and the repurchase agreement market in the shadow banking system.