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 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.

Bibliographic Details

Main Authors:	Barattieri, Alessandro, Eden, Maya, Stevanovic, Dalibor
Language:	English en_US
Published:	World Bank, Washington, DC 2013-10
Subjects:	ACCOUNTING, ACCOUNTING RULE, AMOUNT OF CREDIT, ASSET BACKED SECURITIES, ASSET CLASS, AVAILABILITY OF CREDIT, BACKED SECURITIES, BALANCE SHEET, BALANCE SHEETS, BANK LENDING, BANK LOANS, BANK RUNS, BANKING REGULATION, BANKING SECTOR, BANKING SYSTEM, BOND, BOND YIELD, BORROWER, BROKERS, BUSINESS CYCLE, CAPITAL FLOWS, CAPITAL REGULATION, COLLATERAL, COMMERCIAL BANK, COMMERCIAL BANK CREDIT, COMMERCIAL BANKING, COMMERCIAL BANKS, COMMERCIAL BANKS CREDIT, COMMERCIAL LOANS, COMMODITIES, COMMODITY, COMMODITY PRICE, COMMODITY PRICES, COMMON STOCK, COMPLEX SECURITIES, CONSUMER CREDIT, CONSUMER EXPECTATIONS, CONSUMER GOODS, CONSUMER LOANS, CONSUMPTION EXPENDITURE, CORPORATE BONDS, CREDIT CHAIN, CREDIT MARKET, CREDIT MARKETS, CREDIT OUTSTANDING, CREDIT SPREADS, CREDIT UNIONS, DEBT, DEBT OBLIGATIONS, DEFLATORS, DEPOSIT, DEPOSIT INSURANCE, DEPOSITORY, DEPOSITORY INSTITUTIONS, DEPOSITS, DEREGULATION, DERIVATIVE, DERIVATIVES, DEVELOPMENT POLICY, DIVIDEND, DIVIDEND YIELD, DURABLE, DURABLE GOODS, DURABLES, EARNINGS, ECONOMETRICS, ECONOMIC ACTIVITY, ECONOMICS, ELASTICITY, ENDOGENOUS VARIABLES, ENFORCEABILITY, ENTREPRENEUR, ENTREPRENEURS, EQUIPMENT, EXCHANGE RATE, EXPECTED RETURN, EXPORTS, FEDERAL RESERVE, FEDERAL RESERVE BANK, FINANCE COMPANIES, FINANCIAL CONTAGION, FINANCIAL CRISIS, FINANCIAL GLOBALIZATION, FINANCIAL INNOVATION, FINANCIAL INSTITUTION, FINANCIAL INSTITUTIONS, FINANCIAL INTERMEDIARIES, FINANCIAL INTERMEDIARY, FINANCIAL INTERMEDIATION, FINANCIAL MARKETS, FINANCIAL MODERNIZATION, FINANCIAL PRODUCTS, FINANCIAL SECTOR, FINANCIAL SECTORS, FINANCIAL STABILITY, FINANCIAL SYSTEM, FINANCIAL SYSTEMS, FLOW OF FUNDS, FOREIGN EXCHANGE, FUTURE RESEARCH, GDP, GDP DEFLATOR, GLOBALIZATION, GROSS DOMESTIC PRODUCT, HOLDING, HOME MORTGAGES, HOUSEHOLDS, HUMAN CAPITAL, ID, ILLIQUID ASSET, ILLIQUID ASSETS, INFLATION, INFLATION RATE, INITIAL DEBT, INSURANCE, INSURANCE COMPANIES, INSURANCES, INTEREST INCOME, INTEREST RATE, INTEREST RATE CHANGES, INTERNATIONAL BANK, INVENTORIES, INVESTING, INVESTMENT BANKING, INVESTMENT DECISION, INVESTMENT INCOME, INVESTMENT OPPORTUNITIES, INVESTMENT OPPORTUNITY, INVESTMENT PROJECTS, INVESTMENT VEHICLE, LENDER, LENDERS, LENDING DECISION, LIFE INSURANCE, LIFE INSURANCE COMPANIES, LIQUIDITY, LOAN, LOAN MARKET, LOCAL GOVERNMENT, M1, M2, MACROECONOMIC VARIABLES, MACROECONOMICS, MARKET INSTRUMENTS, MATURITIES, MERGERS, MONETARY AUTHORITY, MONETARY CONTROL, MONETARY POLICY, MONETARY SHOCK, MONETARY SHOCKS, MONETARY TRANSMISSION, MONETARY TRANSMISSION MECHANISM, MONEY MARKET, MORTGAGE, MORTGAGE POOLS, MORTGAGES, MUNICIPAL SECURITIES, MUTUAL FUNDS, NET WORTH, OPEN MARKET, OUTPUT, PENSION, PENSION FUNDS, PERFORMANCE MEASURES, POLITICAL ECONOMY, PRIVATE PENSION, REAL GDP, REAL GROSS DOMESTIC PRODUCT, RECESSION, RESERVE, RESERVE REQUIREMENT, RESERVES, RETURN, RETURNS, RISK PROFILES, RISK TAKING, SAVINGS, SAVINGS INSTITUTIONS, SECURITIES, SECURITIZATION, SHARE OF ASSETS, SHARE OF CREDIT, SPOT MARKET, STOCK PRICE, STRUCTURAL CHANGE, SYSTEMIC RISK, TECHNOLOGICAL CHANGE, TRADE CREDIT, TRADING, TRADITIONAL FINANCIAL INSTITUTIONS, TREASURIES, TREASURY, TREASURY SECURITIES, UNEMPLOYMENT, UNEMPLOYMENT RATE, VALUATION, VALUE ADDED, VAR MODELS, VOLATILITY, WAGES, WEALTH,
Online Access:	http://documents.worldbank.org/curated/en/2013/10/18412872/connection-between-wall-street-main-street-measurement-implications-monetary-policy https://hdl.handle.net/10986/16881
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