Shadow Banking and Macroeconomic Efficiency: The Effect of Shadow Banking on Key Macroeconomic Factors

Abstract

This thesis investigates the effects that the presence of Shadow Banking activities, in terms of the level of assets belonging to Other Financial Intermediaries (OFIs), can have on one country’s macroeconomic indicators, utilizing a panel data of 26 countries. In particular, this thesis proposes a two-way fixed effect model, supported by Vector Autoregressive models and co-integration tests to study the influence that OFIs’ assets have on economic efficiency, measured by economic growth (GDP), inflation (CPI), liquidity (broad money), unemployment and the level of real interest rate. Shadow Banking activities do have a significant impact on economic activity, and this relationship results to be overall positive, but turns negative during the post-crisis period, mainly due to tightening of regulatory mechanisms. Moreover, OFIs show a positive effect on monetary indicators by providing significant credit expansion together with commercial banks and this effect is likely to be larger in the pre-crisis period and in developing countries. When turning to the case of inflation, Shadow Banking intermediation has no direct effect, unless, due to weak financial regulations, financial intermediaries have an impact on credit creation, as in the case of developing countries. The causal effect between OFIs and unemployment is weakly significant for most of the countries considered, as well as for the relationship with real interest rate. However, for the latter, in case of a significant impact, the direction of the causality is negative.