| Abstract | Recently, shadow banking system in China has drawn great attraction from market, academic researchers and supervisors. In this paper, we incorporate a shadow banking sector, which plays an essential role in high risk credit market, in a DNK-DSGE framework. We argue that Chinese shadow banking system is distinctively different from the ones in developed markets, it’s just an extension of conventional commercial banking system. We find that after a positive interest rate shock, shadow banks will expand their credit and high-risk firms, which can only get financed from shadow banks, will leverage. Meanwhile, commercial banking system will be depressed. While after a negative interest rate shock, the opposite is just true. Although shadow banking system plays a complementary role in financial intermediaries sector, it weakens the effectiveness of monetary policy. In addition, risk appetite of shadow bankers and agency problem will affect shadow bank interest rate and other macro-variables significantly. |