Discussion paper

DP13144 Retirement in the Shadow (Banking)

The U.S. economy has recently experienced a large increase in life expectancy and in shadow banking activities. We argue that these two phenomena are intimately related. Agents rely on financial intermediaries to insure consumption during their uncertain life spans after retirement. When they expect to live longer, they rely more heavily on financial intermediaries that are riskier but offer better insurance terms – including 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 they may have contributed around 0.6GDP to output, four times larger than the estimated costs of the crisis.


Ordoñez, G and F Piguillem (2018), ‘DP13144 Retirement in the Shadow (Banking)‘, CEPR Discussion Paper No. 13144. CEPR Press, Paris & London. https://cepr.org/publications/dp13144