Managing Shadow Money

This research project explores the process of modern (shadow) money creation in hierarchical and interconnected monetary systems. In theorizing the dynamic instability of shadow money, it provides a comparative account of the structural and institutional specifics of shadow money in the US, Eurozone and China, and the policy challenges thereof.

“What does the rise of shadow banking mean for monetary theory and practice? Mehrling, Pozsar, et al offer a radical rethink that considers the institutional and spatial characteristics of (shadow) money creation, set against a global market-based financial system characterized by the increasing tradability of risk. In this approach, shadow money codifies new relationships between cash-rich institutional investors and risk-driven levered portfolio investors, transforming money hierarchies.

This project draws on theoretical insights from this new approach to extend the foundations of shadow money theories in two directions. First, the project introduces uncertainty as a fundamental characteristic of modern (shadow) money creation in hierarchical and interconnected monetary systems and provides a comparative account of shadow money creation and management across different financial structures. It asks how the creation of shadow money varies with financial system structure, comparing the US, Eurozone, and China. Second, the project explores how this influences the tools and institutional frameworks for managing shadow money. Most shadow monies, public and private, are repo claims supported by tradable collateral. This is key to exploring the dynamic (in)stability of shadow money creation. The premise of this project is that Treasuries have become important in modern money creation as key collateral factories for shadow banking. On the terrain of public shadow money, the connections and potential conflicts between fiscal, monetary and macroprudential policies become apparent. This research further considers the supranational dimension of shadow money creation and management, as in the Financial Stability Board work on shadow banking.”