The Effects of Shadow Banking on the Transmission of Monetary Policy

Abstract

I present empirical evidence that shadow banks weaken the pass through of monetary policy to
the real economy by weakening the bank lending channel. I construct a novel dataset of home mortgage loan originations from the Home Mortgage Disclosure Act (HMDA) matched with county level home prices and labor market outcomes for years 2000 through 2019. I fi nd that shadow banks expand mortgage originations relative to traditional banks as the monetary policy rate increases. This effect is economically large even when controlling for loan demand by comparing shadow and traditional bank lenders within the same county. In addition, I estimate the impact of shadow bank presence on the transmission of monetary policy to the real economy by exploiting county level heterogeneity in shadow bank exposure. My results indicate that as the monetary policy rate increases counties with more exposure to shadow banking experience smaller contractions in home prices, employment, and wages relative to those with less exposure to shadow banking. These results indicate that the recent expansion in shadow mortgage banking has weakened an important channel through which monetary policy affects the real economy.