مهران زارعی

Monetary policy is one of the most important tools for policymakers to influence macroeconomic variables including production. However, implementing this policy sometimes yields unintended consequences. Understanding monetary policy transmission mechanisms is therefore critical for effective implementation. Research following the 2008-2009 financial crisis indicates that the shadow banking activity can disrupt the monetary policy transmission and weaken its effectiveness. An analysis of Iran’s financial system reveals increasing shadow banking activity. This paper therefore examines how shadow banking affects monetary policy transmission in Iran using a DSGE model that innovatively incorporates the shadow banking sector. We compare two scenarios: a financial system without shadow banking and one including shadow banking. The effects of two contractionary monetary policies—interest rate increase and reductions in money supply growth—on GDP, investment, and inflation were analyzed under each scenario. The findings indicate that shadow banking diminishes monetary policy’s impact on all three variables by weakening the credit channel of monetary policy transmission. In the scenario without shadow banking, In the scenario without shadow banking, all three variables will decline in response to the monetary shock of decreasing money supply growth. However, in the scenario with shadow banking, investment levels are not declining but rising. The impact of monetary policy on output and inflation is diminished in the presence of shadow banking. In the case of interest rate shocks, the results also indicate a negative impact of shadow banking on the effectiveness of monetary policy.

Shadow banking is a term that came out of the financial crisis of 2007-2009. There is a belief that shadow banking was one of the crisis reasons. Because the excessive expansion of shadow banking endangers the financial stability of countries, this paper examines the impact of shadow banking on financial stability using data from 14 countries of the G20 during 2002-2018. We divided countries into four groups according to the level of shadow banking activity; then, we employed the quantile regression method. The results indicated that shadow banking hurts financial stability (positive impact on financial instability) in countries with a high shadow banking index (fourth group countries). One unit of increase in the shadow banking index increases financial instability in the fourth group countries (high shadow banking) by 1.6 units. But in countries where shadow banking is not very strong (other three groups), shadow banking does not significantly affect financial stability.