Money Creation and the Shadow Banking System

Sunderam, Aditya

doi:10.1093/rfs/hhu083

“…They document that the share of safe assets in the U.S. economy, including both U.S. Treasury 1 debt and privately-created near-riskless debt has remained constant as a percentage of all U.S. assets since 1952. Xie (2012) shows that the issuance of asset-backed securities tends to occur when the outstanding government debt is low and Sunderam (2012) documents the same phenomenon with respect to asset-backed commercial paper. The substitution between public and private safe debt is also shown by Krishnamurthy and Vissing-Jorgensen (2012a) who document that changes in the supply of outstanding U.S. Treasuries have large effects on the yields of private-created assets.…”

Section: Safe Assets Are Important As Explained Recently By the Intementioning

confidence: 94%

The Supply and Demand for Safe Assets

Gorton

¹

,

Ordóñez

²

2013

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There is a demand for safe assets to use as collateral to back loans. Privatelyproduced collateral may be of different quality and if agents do not produce information about the quality, then even bad collateral can optimally be used to back loans, increasing output and consumption. But, if information is produced about the quality of privately-produced collateral, there is a crisis. The introduction of government debt alters the information environment, changing the incentives for private agents to produce information about collateral quality. Even a small amount of government debt can have a large effect. The economy is fragile to the extent that only privately-produced safe assets are relied upon.

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“…Shadow bank liabilities can substitute for money in the private sector's asset allocation. Sunderam (2012) shows that shadow banking liabilities respond to money demand shocks. Gallin (2013) provides a comprehensive map of the amount of short term funding from the shadow banking system to the real economy, based on the flow of funds statistics.…”

mentioning

confidence: 99%

Monetary Policy, Financial Conditions, and Financial Stability

Adrian

¹

,

Liang

²

2014

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractIn the conduct of monetary policy, there exists a risk-return trade-off between financial conditions and financial stability, which complements monetary policy's traditional trade-off between inflation and real activity. The trade-off exists even if monetary policy does not target financial stability considerations independently of its inflation and real activity goals, because risks to future financial stability are increased by the buildup of financial vulnerabilities from persistent accommodative monetary policy when the economy is close to potential. We review monetary policy transmission channels and financial frictions that give rise to this trade-off between financial conditions and financial stability, within a monitoring program across asset markets, banking firms, shadow banking, and the nonfinancial sector. We focus on vulnerabilities that affect monetary policy's risk-return trade-off, including 1) pricing of risk, 2) leverage, 3) maturity and liquidity mismatch, and 4) interconnectedness and complexity. We also discuss the extent to which structural and time-varying macroprudential policies can counteract the buildup of vulnerabilities, thus mitigating monetary policy's risk-return trade-off.

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“…The pro-cyclical nature of this collateral based financial system, through funding and asset price fluctuations, is now seen by many as the essential feature of the shadow banking system. Our understanding of the interaction between the regulated banking system, other regulated financial entities and privately organized markets is still incomplete, partly due to lack of data, but recent papers study the role of shadow banking liabilities in the money supply (Sunderam 2012) and explore the impact of shadow money creation on macroeconomic fluctuations (Moreira and Savov 2012).…”

Section: Shadow Banking Redefinedmentioning

confidence: 99%

Shadow Banking: Policy Challenges for Central Banks

Moe

¹

2014

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Levy Economics Institute Working Paper Collection presents research in progress by Levy Institute scholars and conference participants. The purpose of the series is to disseminate ideas to and elicit comments from academics and professionals. Terms of use: Documents inLevy Economics Institute of Bard College, founded in 1986, is a nonprofit, nonpartisan, independently funded research organization devoted to public service. Through scholarship and economic research it generates viable, effective public policy responses to important economic problems that profoundly affect the quality of life in the United States and abroad. to end up bankrolling too-big-to-fail financial markets.

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Money Creation and the Shadow Banking System

Cited by 187 publications

References 32 publications

The Supply and Demand for Safe Assets

The Supply and Demand for Safe Assets

Monetary Policy, Financial Conditions, and Financial Stability

Shadow Banking: Policy Challenges for Central Banks

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