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The demand for banking and shadow banking services

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  • Serletis, Apostolos
  • Xu, Libo

Abstract

We explore the hypothesis that the substitutability/complementarity relationship between banking and shadow banking services is a major factor affecting the transmission mechanism of monetary policy. We take the parametric approach to demand analysis, which allows estimation and testing in a systems-of-equations context, and use the Minflex Laurent flexible functional form for the underlying aggregator function. We relax the homoskedasticity assumption and assume Markov regime switching to relax the assumption of fixed consumer preferences. We generate inference consistent with neoclassical microeconomic theory and provide evidence against simple-sum money supply measures. We also show that the emergence of shadow banking has increased the stability of money demand functions. This means that money supply measures based on a nonlinear aggregator function might be a better measure of the stance of monetary policy than the interest rate.

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  • Serletis, Apostolos & Xu, Libo, 2019. "The demand for banking and shadow banking services," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 132-146.
    • Handle: RePEc:eee:ecofin:v:47:y:2019:i:c:p:132-146
    DOI: 10.1016/j.najef.2018.12.009
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    Cited by:

    1. Ferry Syarifuddin & Prayudhi Azwar, 2019. "The Scope, Prospect And Implication Of New Form Of Financial Intermediation For Monetary Policy In Indonesia," Working Papers WP/08/2019, Bank Indonesia.
    2. Ridoy Deb Nath & Mohammad Ashraful Ferdous Chowdhury, 2021. "Shadow banking: a bibliometric and content analysis," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-29, December.
    3. Si, Deng-Kui & Li, Xiao-Lin, 2022. "Shadow banking business and firm risk-taking: Evidence from China," Research in International Business and Finance, Elsevier, vol. 62(C).
    4. Yan, Youliang & Wang, Maochuan & Hu, Guoliu & Jiang, Chengxin, 2024. "Does Confucian culture affect shadow banking activities? Evidence from Chinese listed companies," Research in International Business and Finance, Elsevier, vol. 68(C).
    5. Istiak, Khandokar, 2019. "The nature of shadow bank leverage shocks on the macroeconomy," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).

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    More about this item

    Keywords

    Minflex Laurent functional form; Markov regime switching; GARCH; BEKK; Volatility impulse response functions; C3; C13; C51; E41; E42; E51;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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