Financial intermediaries and monetary economics

Tobias Adrian and Hyun Song Shin

No 398, Staff Reports from Federal Reserve Bank of New York

Abstract: We reconsider the role of financial intermediaries in monetary economics. We explore the hypothesis that financial intermediaries drive the business cycle by way of their role in determining the price of risk. In this framework, balance sheet quantities emerge as a key indicator of risk appetite and hence of the "risk-taking channel" of monetary policy. We document evidence that the balance sheets of financial intermediaries reflect the transmission of monetary policy through capital market conditions. We find short-term interest rates to be important in influencing the size of financial intermediary balance sheets. Our findings suggest that the traditional focus on the money stock for the conduct of monetary policy may have more modern counterparts, and we suggest the importance of tracking balance sheet quantities for the conduct of monetary policy.

Keywords: Interest rates; Capital market; Intermediation (Finance); Monetary policy; Risk; Business cycles (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-bec, nep-cba, nep-mac and nep-mon
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Chapter: Financial Intermediaries and Monetary Economics (2010)
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