Conceptualizing the Shadow Financial System in a Stock-Flow Consistent Framework
Global Business & Economics Anthology, Vol. 2, pp. 268-279, December 2008
12 Pages Posted: 9 Nov 2008 Last revised: 12 Apr 2011
Date Written: November 7, 2008
Abstract
In this paper, we aim at conceptualizing anew the shadow financial system with the introduction of an institutional sector composed of all the unregulated non-banking financial institutions (NBFIs) that fall outside the regulatory scope of central banks. This new sector is first defined as a broad accounting category in a macroeconomic stock-flow consistent accounting framework inspired by the works of Lavoie and Godley. We then argue that the macroeconomic consequences of financialization can be better explained with such an accounting framework that captures how the economic system functions as an organic whole wherein the shadow financial system is constantly interacting with the traditional sectors of the economy (households, firms, traditional deposit-taking financial institutions and the government sector).
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