The Connection between Wall Street and Main Street : Measurement and Implications for Monetary Policy
This paper proposes a measure of the extent to which a financial sector is connected to the real economy. The Measure of Connectedness is a measure of the composition of assets, namely the share of credit to the non-financial sectors over the total...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2013/10/18412872/connection-between-wall-street-main-street-measurement-implications-monetary-policy http://hdl.handle.net/10986/16881 |
| Summary: | This paper proposes a measure of the
extent to which a financial sector is connected to the real
economy. The Measure of Connectedness is a measure of the
composition of assets, namely the share of credit to the
non-financial sectors over the total credit market
instruments. The aggregate Measure of Connectedness for the
United States declines by about 27 percent in the period
1952-2009. The authors suggest that this increase in
disconnectedness between the financial sector and the real
economy may have dampened the sensitivity of the real
economy to monetary shocks. They present a stylized model
that illustrates how interbank trading can reduce the
sensitivity of lending to the entrepreneur's net worth,
thereby dampening the credit channel transmission of
monetary policy. The Measure of Connectedness is interacted
with both a structural vector autoregressive model and a
factor-augmented vector autoregressive model for the United
States economy. The analysis establishes that the impulse
responses to monetary policy shocks are dampened as the
level of connection declines. |
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