Tuesday, June 9, 2015 | 2:00pm–3:30pm | Room 333, HSBC Business School Building

Abstract

We document that in the U.S., the share of financial assets that have a direct counterpart in the financial system has increased by between 15.8 and 21.8 percentage points during the period 1952-2011. We suggest that this increase may have dampened the sensitivity of the real variables to monetary shocks. Using a SVAR and a FAVAR, we establish that the impulse responses to monetary policy shocks are dampened as the level of interconnectedness increases. Finally, we present a stylized model that illustrates how interbank trading can reduce the sensitivity of lending to the entrepreneur's net worth.