Monetary cycles, financial cycles, and the business cycle
Tobias Adrian (),
Arturo Estrella and
Hyun Song Shin
No 421, Staff Reports from Federal Reserve Bank of New York
One of the most robust stylized facts in macroeconomics is the forecasting power of the term spread for future real activity. The economic rationale for this forecasting power usually appeals to expectations of future interest rates, which affect the slope of the term structure. In this paper, we propose a possible causal mechanism for the forecasting power of the term spread, deriving from the balance sheet management of financial intermediaries. When monetary tightening is associated with a flattening of the term spread, it reduces net interest margin, which in turn makes lending less profitable, leading to a contraction in the supply of credit. We provide empirical support for this hypothesis, thereby linking monetary cycles, financial cycles, and the business cycle.
Keywords: Monetary policy; Intermediation (Finance); Interest rates; Forecasting; Business cycles (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cba, nep-for, nep-mac and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (15) Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:421
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Staff Reports from Federal Reserve Bank of New York Contact information at EDIRC.
Bibliographic data for series maintained by Amy Farber ().