The Connection between Wall Street and Main Street: Measurement and Implications for Monetary Policy

Alessandro Barattieri, Maya Eden () and Dalibor Stevanovic

Abstract: We propose a measure of the extent to which a financial sector is connected to the real economy. The Measure of Connectedness is the share of credit market instruments represented by claims whose direct counterpart belongs to the non-financial sectors. The aggregate U.S. Measure of Connectedness declines by about 27% in the period 1952-2009. We 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. We 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. Finally, we interact our measure with both a SVAR and a FAVAR for the U.S. economy, and establish that the impulse responses to monetary policy shocks are dampened as the level of connection declines.

Keywords: Connection; financial sector; real economy; monetary policy transmission mechanism (search for similar items in EconPapers)
JEL-codes: E44 E52 G20 (search for similar items in EconPapers)
Date: 2013-08-01
New Economics Papers: this item is included in nep-cfn, nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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Working Paper: The Connection between Wall Street and Main Street: Measurement and Implications for Monetary Policy (2013)
Working Paper: The connection between Wall Street and Main Street: measurement and implications for monetary policy (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:cir:cirwor:2013s-31

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