Monetary policy shocks in a DSGE model with a shadow banking system

• Type: Academic Work
• Date: 2011

Authors

Fabio Verona (Author) Other; Manuel Mota Freitas Martins (Author) FEP; Inês Drumond (Author) FEP

Scientific classification

FOS: Social sciences > Economics and Business

CORDIS: Social sciences > Economics

Other information

Abstract (EN): This paper is motivated by the recent nancial crisis and addresses whether a too low for too long interest rate policy may generate a boom-bust cycle. We suggest a model in which a microfounded shadow banking sector is included in an otherwise state-of-the-art DSGE model. When faced with perverse incentives, financial intermediaries within the shadow banking sector can divert a fraction of stockholders' profits for their own benets and extend credit at a discounted rate. The model predicts that long periods of accommodative monetary policy do create the preconditions for, but do not cause per se, a boom-bust cycle. Rather, it is the combination ofa persistent monetary ease with microeconomic distortions in the financial system that causes a boom-bust.

Language: English

Type (Professor's evaluation): Scientific

Notes: Cef.up Working Paper nº. 2011-01, February 2011, https://www.fep.up.pt/investigacao/cef.up/WP/2011/2011_01_wp.pdf