Work in progress

Financial Intermediation, Treasury Supply, and Shadow Banks. [Draft available upon request]

U.S. data shows that domestic financial intermediaries, especially shadow banks, are major holders of Treasuries. Do the Treasury holdings of these intermediaries provide a new transmission channel of expansionary fiscal policy? Empirical evidence based on well-defined Treasury supply shocks documents differential responses by commercial and shadow banks. Using a quantitative dynamic general equilibrium model including two types of financial intermediaries issuing money-like claims and providing capital, I find that an increased Treasury supply reallocates productive capital from commercial to shadow banks. This reallocation is caused by shadow banks reducing their Treasury holdings to absorb claims in productive capital sold by commercial banks. An expanding supply of government debt increases the convenience yield on intermediary debt, also incentivizing leverage expansion. This mechanism is stronger for shadow banks, allowing them to expand. In addition, it also erodes the net worth of intermediaries, with a more persistent impact on commercial banks. The liquidity provision falls immediately, and lending follows in the medium run. Almost half of the welfare loss is attributed to disruption in the financial sector.

Presentations: Annual Meeting of the Portuguese Economic Journal (2025, Carcavelos), Bonn-Cologne-Frankfurt-Mannheim PhD Conference (2025, Frankfurt), PhD Macro Modeling Seminar (2025, Frankfurt), Theories and Methods in Macroeconomics (2024, Amsterdam), Tinbergen Institute PhD Seminar (2024, Amsterdam), Nova Macro Working Group (2023, Lisbon), and Nova SBE PhD Research Group (2023, Lisbon).