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Do NBFCs propagate real shocks?

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  • Ghosh, Saurabh
  • Mazumder, Debojyoti

Abstract

Notwithstanding a smaller share of total loans vis-à-vis commercial banks, we investigate a possible role of Non-banking financial companies (NBFCs) in propagating a real shock to the rest of the economy. Our two-sector model captures emerging economy characteristics such as NBFC borrowings from commercial banks, heterogeneities in financial constraints, and labour market friction faced by firms. Our theoretical and simulation results, using Indian parameters, indicate that an idiosyncratic shock (i.e., higher realization of the failed firms) and a sectoral productivity shock (in the sector financed by NBFCs) increase the interest rate charged by the banks, and the unemployment rate while reducing the real wages and per capita capital formation. However, the reverse happens given a structural shock, assumed as an increase in the average number of failed firms. Early detection of such shocks and quick policy intervention are required to provide a cushion for capital formation and job creation.

Suggested Citation

  • Ghosh, Saurabh & Mazumder, Debojyoti, 2023. "Do NBFCs propagate real shocks?," Journal of Asian Economics, Elsevier, vol. 85(C).
    • Handle: RePEc:eee:asieco:v:85:y:2023:i:c:s1049007823000106
    DOI: 10.1016/j.asieco.2023.101590
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    More about this item

    Keywords

    NBFC; Bank-NBFC interaction; Search and matching unemployment;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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