Retirement in the Shadow (Banking)

ECB
By September 16, 2019 18:23

Retirement in the Shadow (Banking)

The U.S. economy has recently experienced two, seemingly unrelated, prominent phenomena: a large increase in life expectancy conditional on retirement and a major expansion in securitization and shadow banking activities. We argue that they may be indeed intimately related. Agents rely on financial intermediaries to save for consumption during their uncertain life spans after retirement. When they expect to live longer, they rely more heavily on financial instruments and intermediaries that are riskier but offer better saving terms, such as securitization and shadow banks. We calibrate the model to replicate the level of financial intermediation in 1980, introduce the observed change in life expectancy and show that the demographic transition is critical in accounting for the boom in both shadow banking and credit that preceded the recent U.S. financial crisis. We compare the U.S. experience with a counterfactual without shadow banks and show that their contribution in terms of output since the eighties was four times larger than the estimated costs of the crisis since 2008.

ECB
By September 16, 2019 18:23

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