Quarterly Journal of Austrian Economics

Quarterly Journal of Austrian Economics 19, no. 4 (Winter 2016)

ABSTRACT: The aim of this article is to examine the impact of shadow banking on credit expansion and the business cycle. I focus on two main functions of the shadow banking system: securitization and collateral-intermediation. The former enables traditional banks to expand their credit activity, while the latter allows the shadow banks to create new money by themselves. Shadow banking shows that non-banking institutions can also conduct credit expansion and generate the business cycle. Thus, the Austrian business cycle theory should be extended to take into account the way in which shadow banking activity changed the conduct of credit expansion.

KEYWORDS: shadow banking, business cycle, credit expansion, Austrian business cycle theory, securitization, collateralization

JEL CLASSIFICATION: B53, E32, E51, G21, G23

Published on the Mises Wire