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The connection between Wall Street and Main Street : measurement and implications for monetary policy
 
Author:Barattieri, Alessandro; Eden, Maya; Stevanovi, Dalibor; Collection Title:Policy Research working paper ; no. WPS 6667
Country:World; Date Stored:2013/10/18
Document Date:2013/10/01Document Type:Policy Research Working Paper
SubTopics:Access to Finance; Emerging Markets; Economic Theory & Research; Debt Markets; Financial IntermediationLanguage:English
Major Sector:FinanceRel. Proj ID:1W-Capital Flows And Financial Integration -- -- P053639;
Region:The World RegionReport Number:WPS6667
Sub Sectors:General finance sectorTF No/Name:TF015108-KCP II - Firm Financing from Capital Markets; TF092859-KCP - CAPITAL RAISING ACTIVITY IN DOMESTIC AND INTERNATIONAL MARKETS; TF098583-KCP II - On the use of domestic and international debt markets; BBRSB-BB RESEARCH SUPPORT BUDGET; TF040198-WORLD:; TF094565-KCP II - GLOBALIZATION, RISK, AND CRISES; TF010688-KCP II - Understanding Capital Flows to Developing Countries; TF040145-WORLD:; TF015022-KCP II - Institutional Investors; TF092864-CAUSES AND CONSEQUENCES OF MACROECONOMIC VOLATILITY
Volume No:1 of 1  

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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