The Fall in Shadow Banking and the Slow U.S. Recovery

We argue that shocks to traditional and shadow banks were important drivers of the U.S. economy during the Great Recession and the Slow Recovery. This result follows from a DSGE model featuring a heterogeneous banking sector estimated from macroeconomic and financial observables. Our model attributes the Great Recession to negative shocks to the aggregate supply of loans. A more novel result is that a shock specific to shadow bank intermediation accounts for much of the Slow Recovery. According to our estimates, the collapse of shadow banking after the financial crisis can explain an important part of the subdued path of GDP, investment, and inflation several years into the recovery.