A DSGE model of shadow banking in the US

Zheng, Yuqi 2025. A DSGE model of shadow banking in the US. PhD Thesis, Cardiff University. Item availability restricted.

Preview	PDF - Accepted Post-Print Version Download (3MB) | Preview
	PDF (Cardiff University Electronic Publication Form) - Supplemental Material Restricted to Repository staff only Download (121kB)

Abstract

In this paper, the role of shadow banking is examined in a DSGE model by allowing shadow bank lending to firms. Finding that shadow banking lending is beneficial to macroeconomic stability as it dampens the responses of the variables to shocks and affects the effectiveness of macro-prudential policy. The baseline model with the shadow-banking sector is contrasted with a counterfactual one in which shadow banking shuts off. The model is then tested and re-estimated by the method of Indirect Inference. I find that this shadow banking model fits better than the counterfactual one. The Indirect inference estimation results imply that higher estimates on the share of direct equity investment can help reduce the credit premium by providing a cheaper channel for credit leakage. Thus, the existence of the shadow banking lowers the frictions by protecting investment immune from shocks. I then extract the model’s implied residuals on US unfiltered data since 1980 to replicate how the model predicts the crisis and look at the variance decomposition by running a variety of simulations bootstrapped from different sets of shocks in the sample. I find that the non-stationary productivity shock is the main driver of the US business cycle fluctuations. In addition, I also find that shadow banking can stabilize output, consumption and labour effectively and reduce welfare loss, indicating that the shadow banking model would stabilise the economy.

Item Type:	Thesis (PhD)
Date Type:	Completion
Status:	Unpublished
Schools:	Schools > Business (Including Economics)
Date of First Compliant Deposit:	16 December 2025
Last Modified:	16 Dec 2025 12:47
URI:	https://orca.cardiff.ac.uk/id/eprint/183275

Actions (repository staff only)

Edit Item