We investigate the response of the central bank to the change in size of non-bank financial
intermediaries. Using quarterly data for the U.S. over the period 1946:Q1-2016Q4, we find that
when faced with an increase in the asset growth of the securities' brokers and dealers and the
shadow banking sector, the monetary authority reacts by raising the short-term nominal interest
rate. This response is stronger in the case of sharp variation in the size of the balance sheet of nonbank financial intermediaries. From a policy perspective, our study suggests that an extended
version of the original Taylor rule - embedding both price stability and financial stability concerns –
provides a good characterisation of the monetary policy reaction function.
Funding
National Funds of the FCT – Portuguese Foundation for Science and Technology within the project "UID/ECO/03182/2019".
This is the peer reviewed version of the following article: AGNELLO, L. … et al, 2019. How does monetary policy respond to the dynamics of the shadow banking sector?. International Journal of Finance and Economics, 25 (2), pp.228-247, which has been published in final form at https://doi.org/10.1002/ijfe.1748. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.