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‘Private Debt as Shadow Money? Conceptual Criteria and Empirical Evaluation’ (with Tobias Pforr)

Following the 2007-9 Financial Crisis, some scholars have come to perceive the financial structures that faced a run at the time as ‘shadow banking system’ and connect it to the emergence of new monetary instruments. This is the starting point for thinking about various forms of private debt as ‘shadow money’. Currently, there are several shadow money theories on the market for ideas, with seemingly very different conceptualizations of shadow money. This paper looks at the three most pertinent shadow money theories and argues that, despite different terminology and intellectual ancestry, they are all build around three decisive criteria: Shadow money must be met by a demand that considers it an alternative to established forms of money, has to trade at par to higher-ranking forms of money and must be created through a swap of private debt certificates (IOUs). Based on these criteria, the paper looks at four instruments to discuss if and under which conditions they correspond, or have corresponded, to the category of shadow money. These are money market fund shares, overnight repurchase agreements, asset-backed commercial papers and foreign exchange swaps. We argue that the disagreement on the actual instruments that count as shadow money then depends on how strictly the criteria are applied to real-world financial instruments. If we expect a full congruence with the ideal type of shadow money, then none of the instruments can be categorized as such. If we allow for more variation, then all of the instruments may correspond to it.

Presentation at Intersections of Finance and Societies conference, London (12/2019)

Tobias Pforr, University of Reading

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