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On the Macroeconomic Effects of Shadow Banking Development

Author

Listed:
  • Georgios Magkonis

    (University of Portsmouth)

  • Eun Young Oh

    (University of Portsmouth)

  • Shuonan Zhang

    (University of Portsmouth)

Abstract

We build and estimate a dynamic stochastic general equilibrium model with risky innovation and shadow credits to study the macroeconomic implications of shadow banking (SB), particularly on productivity. Our analysis is motivated by negative relationships between SB development and innovation outcome or total factor productivity (TFP) growth. In our model, information asymmetry associated with technology utilization leads to an agency problem in which shadow intermediation reduces banks’ incentives to screen project quality. An SB boom crowd-out traditional financial services, decreases inno- vation quality and technology efficiency, and thereby reduces TFP. In the light of model mechanisms, we analyse cross-country differences and deliver important implications of SB. SB development mainly driven by financial factors (e.g., the US case) leads to significant loss on TFP while that relatively prompted by real-sided factors (e.g., China and the EA cases), could be less harmful.

Suggested Citation

  • Georgios Magkonis & Eun Young Oh & Shuonan Zhang, 2022. "On the Macroeconomic Effects of Shadow Banking Development," Working Papers in Economics & Finance 2022-06, University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group.
    • Handle: RePEc:pbs:ecofin:2022-06
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    References listed on IDEAS

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    More about this item

    Keywords

    Shadow Banking; Total Factor Productivity; Endogenous Growth; Financial Development; Bayesian Methods;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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