A working paper by Nicolò Bandera, Kristina Bluwstein, Michael Kumhof, Mauricio Salgado-Moreno, and Jacob Stevens highlights the growing role of non-bank financial institutions (NBFIs) in credit provision and quantitative easing (QE). The paper, Staff Working Paper No. 1,212, develops a dynamic stochastic general equilibrium (DSGE) model to analyze the interaction between banks, NBFIs, and central banks through wholesale deposits, bonds, and reserve markets.
Read More
The researchers estimate the model using UK data to assess critical parameters in the financial sector. It was found that the traditional transmission of interest rate policy to output and inflation remains largely unchanged despite the expansion of the NBFI sector. However, the impact of QE is significantly influenced by the size of the NBFI sector and the nature of its growth. If NBFIs grow due to firms' funding preferences, the effect of QE is amplified. Conversely, if their growth stems from higher costs of bank financing, the transmission of QE is largely unaffected.
The findings indicate that while monetary policymakers maintain control over interest rates regardless of the financial structure, the effectiveness of balance sheet policies is contingent upon the composition and behavior of the non-bank sector.