Liquidity, monetary policy, and financial cycles

Tobias Adrian and Hyun Song Shin

Current Issues in Economics and Finance, 2008, vol. 14, issue Jan

Abstract: A close look at how financial intermediaries manage their balance sheets suggests that these institutions raise their leverage during asset price booms and lower it during downturns - pro-cyclical actions that tend to exaggerate the fluctuations of the financial cycle. The authors of this study argue that the growth rate of aggregate balance sheets may be the most fitting measure of liquidity in a market-based financial system. Moreover, the authors show a strong correlation between balance sheet growth and the easing and tightening of monetary policy.

Keywords: Intermediation (Finance); Business cycles; Monetary policy; Asset pricing; Liquidity (Economics) (search for similar items in EconPapers)
Date: 2008
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