Shadow banking and the Great Recession: Evidence from an estimated DSGE model

We argue that shocks to credit supply by shadow and retail banks were key to understand the behavior of the US economy during the Great Recession and the Slow  Recovery. We base this result on an estimated DSGE model featuring a rich representation of credit flows. Our model selects the two banking shocks as the most important drivers of the crisis because they account simultaneously for the fall in real activity, the decline in credit intermediation and the rise in lending-borrowing spreads. On the other hand, in contrast with the existing literature, our results assign only a moderate role to productivity and investment efficiency shocks.

KEYWORDS: Shadow Banking, Great Recession, Slow Recovery, estimated DSGE models.
JEL CODES: C32, E32.