Abstract

We study the role of the so-called 'shadow banking' sector in innovating aggregate money supply and providing safe assets to meet demand from assetholders with a need for low-risk, high-liquidity monetary services. We consider the measurement and literature around shadow banking to date, econometrics of modelling money demand, and latent factor approaches. In doing so we contribute to a literature around shadow banking founded on the papers of Pozsar, Adrian, Shin, Gorton, Metrick, and their various co-authors. We set the shadow banking sector within the financial frictions paradigm espoused by Bernanke and co-authors, and our empirical approach builds on the work of Johansen & Juselius (1990), as extended by Stock & Watson (2002). The focus on demand for money in the UK follows the work of Drake & Chrystal (1994). The quarterly-frequency dataset collected follows the work of Errico et al (2014), and covers 38 variables from Q1 1984 to Q2 2016 (130 quarters). The empirical methodology extends the Factor-Augmented VECM approach of Banerjee & Marcellino (2009), and introduces a novel technique of time-cluster analysis in Principal Component space. A novel identification strategy is also applied, extending the work of Johansen & Juselius (1990). Assessing hypotheses due to Pozsar (2013) and to Krishnamurthy & Vissing-Jorgensen (2012), we find evidence that shadow-bank-created 'money' is treated as a safe-asset substitute both for government debt and for deposits in the regulated banking sector.

Awarding Institution(s)

University of Plymouth

Supervisor

Steven Brand, Peijie Wang, Simon Ashby

Keywords

Shadow Banking, Econometrics, VECM, Principal Components

Document Type

Thesis

Publication Date

2020

Deposit Date

June 2024

Comments

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