When Developers Become Lenders: Monetary Policy and Shadow Banking in Real Estate-Driven Economies

Abstract This study examines the macroeconomic effects of Dubai’s growing reliance on developer-financed real estate and its consequences for monetary policy transmission. Using quarterly data for 2015–2025, we estimate Ordinary Least Squares and Instrumental-Variables (2SLS) models, complemented by local projections and an external-shock design. The dependent variable is a monetary policy effectiveness index; key regressors are developer financing and bank financing, with policy rates, inflation (CPI), and money supply (M2) as controls. Robustness is supported by standard diagnostics, and exogenous U.S. Federal Reserve surprises mapped to UAE rates provide identification. Results show developer financing exerts a statistically significant negative effect on policy effectiveness, weakening interest-rate pass-through and increasing liquidity pressures, whereas bank financing contributes positively. Liquidity expansions via M2 further reduce transmission strength, while CPI effects are muted. Dynamic responses indicate bank credit contracts after rate hikes, but developer-led installment flows remain largely unresponsive, confirming a shadow credit channel that circumvents conventional intermediation. The findings imply that non-bank financing should be incorporated into monetary and macroprudential frameworks. For emerging economies where real estate dominates credit formation, bringing developer-led lending into monetary aggregates, supervisory reporting, and stress testing is essential to safeguard policy effectiveness and financial stability.