Private debt as shadow money? Conceptual criteria, empirical evaluation and implications for financial stability

Some scholars have labeled the financial structures that faced a run during the 2007-9 Financial Crisis as ‘shadow banking system’ and have connected it to the emergence of new monetary instruments. This was the starting point for thinking about various forms of private debt as ‘shadow money’. Since then several shadow money theories have emerged, with seemingly different conceptualizations of shadow money. We argue that, despite different terminology and intellectual ancestry, these theories generally agree on three key criteria that define shadow money. A financial instrument 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, we look at four instruments to discuss how and under what conditions they correspond, or have corresponded, to those criteria. These are money market fund shares, overnight repurchase agreements, assetbacked commercial papers and foreign exchange swaps. We show that the disagreement over what instruments to count as shadow money lies in the level of strictness in applying those criteria on real-world financial instruments. If we are mathematically strict, none of the instruments can be categorized as shadow money. If we allow for more empirical variation, then all of the instruments correspond to the definition.