The nature of shadow bank leverage shocks on the macroeconomy

Abstract

Recently a group of non-bank financial institutions, known as the shadow banks, has developed beside the traditional commercial banking sector in the US. Based on the argument of Serletis and Xu (2019) that the traditional banking was overtaken by shadow banks at around the year of 2000, I run two structural VAR models to examine the impact of shadow bank leverage shocks on some key economic indicators in pre-2000 and post-2000 periods. This is a new approach in the literature to examine how the macroeconomy is influenced by the shadow banking sector over time. I find that the traditional contractionary interest rate policy is not helpful to control the leverage of shadow banks. The impulse responses from the VAR models show that shadow bank leverage has become an important economic indicator during the post-2000 period because of its capacity to influence key macroeconomic variables. I suggest the policymakers controlling the leverage of the shadow banks besides the traditional contractionary monetary policy to prevent asset bubbles and maintain financial stability.