Working Paper: NBER ID: w20335
Authors: Alan Moreira; Alexi Savov
Abstract: We build a macroeconomic model that centers on liquidity transformation in the financial sector. Intermediaries maximize liquidity creation by issuing securities that are money-like in normal times but become illiquid in a crash when collateral is scarce. We call this process shadow banking. A rise in uncertainty raises demand for crash-proof liquidity, forcing intermediaries to delever and substitute toward safe, collateral- intensive liabilities. Shadow banking shrinks, causing the liquidity supply to contract, discount rates and collateral premia spike, prices and investment fall. The model produces slow recoveries, collateral runs, and flight to quality and it provides a framework for analyzing unconventional monetary policy and regulatory reform proposals.
Keywords: shadow banking; liquidity transformation; macroeconomics; financial crisis; regulatory reform
JEL Codes: E44; E52; G01; G21; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in uncertainty (D89) | Increase in demand for crashproof liquidity (E41) |
| Increase in demand for crashproof liquidity (E41) | Intermediaries delever (G19) |
| Intermediaries delever (G19) | Reduce shadow banking (G21) |
| Reduce shadow banking (G21) | Contract liquidity supply (E51) |
| Contract liquidity supply (E51) | Spikes in discount rates and collateral premiums (E43) |
| Spikes in discount rates and collateral premiums (E43) | Falling prices and investment (E22) |
| Increase in uncertainty (D89) | Slow recoveries following crises (G01) |
| Slow recoveries following crises (G01) | Economic growth declines (O49) |