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PKSG Working Paper Series

Working Paper PKWP1611

The macroeconomics of shadow banking

June 2016

Alberto Botta, Eugenio Caversazi, Daniele Tori

In this paper, we propose a simple short-run post-Keynesian model in which the key aspects of shadow banking, namely securitization and the production of structured finance instruments, are explicitly formalized. At the best of our knowledge, this is the first attempt to broaden purely real-side post-Keynesian models and their traditional focus on shareholder-value orientation, the financialization of non-financial firms, and the profit-led vs wage-led dichotomy. We rather put emphasis on the role of financial institutions and rentier-friendly environment in determining the predominance of specific growth and distribution regimes. First, we illustrate the macroeconomic rationale of shadow banking practices. We show how, before the 2007-8 crisis, securitization and shadow banking allowed for an increase in profitability for the whole financial sector, while apparently keeping leverage under control. Second, we define a variety of shadow-banking-led regimes in terms of economic activity, productive capital accumulation, and income distribution. We show that both an ‘exhilarationist’ and a ‘stagnationist’ regime may prevail, nevertheless characterized by a probable increase in income inequality between rentiers and wage earners.

Keywords: securitization, shadow banking, leverage, rentiers-led regimes, income distribution

JEL classification: E02: Institutions and the Macroeconomy E12: General Aggregative Models: Keynes; Keynesian; Post-Keynesian G23: Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors

Download: Working Paper PKWP1611