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Financial intermediaries, financial stability, and monetary policy

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Author Info
Tobias Adrian
Hyun Song Shin

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Abstract

In a market-based financial system, banking and capital market developments are inseparable. We document evidence that balance sheets of market-based financial intermediaries provide a window on the transmission of monetary policy through capital market conditions. Short-term interest rates are determinants of the cost of leverage and are found to be important in influencing the size of financial intermediary balance sheets. However, except for periods of crises, higher balance-sheet growth tends to be followed by lower interest rates, and slower balance-sheet growth is followed by higher interest rates. This suggests that consideration might be given to a monetary policy that anticipates the potential disorderly unwinding of leverage. In this sense, monetary policy and financial stability policies are closely linked.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 346.

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Date of creation: 2008
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Handle: RePEc:fip:fednsr:346

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Related research
Keywords: Monetary policy ; Capital market ; Intermediation (Finance) ; Interest rates;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February. [Downloadable!] (restricted)
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  2. Ben S. Bernanke & Mark Gertler, 2001. "Should Central Banks Respond to Movements in Asset Prices?," American Economic Review, American Economic Association, vol. 91(2), pages 253-257, May. [Downloadable!] (restricted)
  3. Friedman, Benjamin M, 1988. "Monetary Policy without Quantity Variables," American Economic Review, American Economic Association, vol. 78(2), pages 440-45, May. [Downloadable!] (restricted)
  4. Adam B. Ashcraft, 2001. "New evidence on the lending channel," Staff Reports 136, Federal Reserve Bank of New York. [Downloadable!]
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  5. Lown, Cara & Morgan, Donald P., 2006. "The Credit Cycle and the Business Cycle: New Findings Using the Loan Officer Opinion Survey," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(6), pages 1575-1597, September. [Downloadable!] (restricted)
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  6. Anil K. Kashyap & Jeremy C. Stein, 1994. "Monetary Policy and Bank Lending," NBER Chapters, in: Monetary Policy, pages 221-261 National Bureau of Economic Research, Inc. [Downloadable!]
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  7. Lasse Heje Pederson & Markus K Brunnermeier, 2007. "Market Liquidity and Funding Liquidity," FMG Discussion Papers dp580, Financial Markets Group. [Downloadable!] (restricted)
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  8. Guillermo Ortiz & Chair, 2003. "Whither monetary and financial stability : the implications of evolving policy regimes," Proceedings, Federal Reserve Bank of Kansas City, pages 225-240. [Downloadable!]
  9. Bordo, Michael D & Jeanne, Olivier, 2002. "Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?," International Finance, Blackwell Publishing, vol. 5(2), pages 139-64, Summer. [Downloadable!] (restricted)
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  10. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
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  11. Charles Bean, 2003. "Asset Prices, Financial Imbalances and Monetary Policy: Are Inflation Targets Enough?," RBA Annual Conference Volume, in: Anthony Richards & Tim Robinson (ed.), Asset Prices and Monetary Policy Reserve Bank of Australia. [Downloadable!]
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  12. Raghuram G. Rajan, 2005. "Has Financial Development Made the World Riskier?," Working Papers id:248, esocialsciences.com. [Downloadable!]
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  13. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  14. Adrian, Tobias & Estrella, Arturo, 2008. "Monetary tightening cycles and the predictability of economic activity," Economics Letters, Elsevier, vol. 99(2), pages 260-264, May. [Downloadable!] (restricted)
  15. Stephen G. Cecchetti & Hans Genberg & Sushil Wadhwani, 2002. "Asset Prices in a Flexible Inflation Targeting Framework," NBER Working Papers 8970, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity, monetary policy, and financial cycles," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Jan. [Downloadable!]
  17. Adam B. Ashcraft, 2005. "Are Banks Really Special? New Evidence from the FDIC-Induced Failure of Healthy Banks," American Economic Review, American Economic Association, vol. 95(5), pages 1712-1730, December. [Downloadable!]
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  18. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(1991-2), pages 205-248. [Downloadable!]
  19. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports 328, Federal Reserve Bank of New York. [Downloadable!]
  20. Claudio Borio & William R. White, 2003. "Whither monetary and financial stability : the implications of evolving policy regimes," Proceedings, Federal Reserve Bank of Kansas City, pages 131-211. [Downloadable!]
  21. William Poole, 2005. "The Fed's monetary policy rule," Speech, Federal Reserve Bank of St. Louis. [Downloadable!]
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  22. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Proceedings, Federal Reserve Bank of Kansas City, pages 77-128. [Downloadable!]
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  23. Tobias Adrian & Michael J. Fleming, 2005. "What financing data reveal about dealer leverage," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Mar. [Downloadable!]
  24. Tobias Adrian & Hyun Song Shin, 2008. "Financial intermediary leverage and value at risk," Staff Reports 338, Federal Reserve Bank of New York. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Katrin Assenmacher-Wesche & Stefan Gerlach, 2008. "Financial Structure and the Impact of Monetary Policy on Asset Prices," CFS Working Paper Series 2008/30, Center for Financial Studies. [Downloadable!]
    Other versions:
  2. Tobias Adrian & Erkko Etula & Hyun Song Shin, 2009. "Global liquidity and exchange rates," Staff Reports 361, Federal Reserve Bank of New York. [Downloadable!]
  3. Tobias Adrian & Hyun Song Shin, 2009. "Money, liquidity, and monetary policy," Staff Reports 360, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  4. Erlend Nier, 2009. "Financial Stability Frameworks and the Role of Central Banks: Lessons from the Crisis," IMF Working Papers 09/70, International Monetary Fund. [Downloadable!]
  5. Masazumi Hattori & Hyun Song Shin & Wataru Takahashi, 2009. "A Financial System Perspective on Japan's Experience in the Late 1980s," IMES Discussion Paper Series 09-E-19, Institute for Monetary and Economic Studies, Bank of Japan. [Downloadable!]
  6. Tirole, Jean, 2009. "Illiquidity and All Its Friends," IDEI Working Papers 572, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  7. William Francis & Matthew Osborne, 2009. "Bank regulation, capital and credit supply: Measuring the Impact of Prudential Standards," Occasional Papers 36, Financial Services Authority. [Downloadable!]
  8. Douglas W. Diamond & Raghuram G. Rajan, 2009. "Illiquidity and Interest Rate Policy," NBER Working Papers 15197, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Jean Tirole & Emmanuel Farhi, 2009. "Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts," Working Papers 2009.57, Fondazione Eni Enrico Mattei. [Downloadable!]
    Other versions:
  10. Arvind Krishnamurthy, 2009. "Amplification Mechanisms in Liquidity Crises," NBER Working Papers 15040, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Michel Aglietta & Ludovic Moreau & Adrian Roche, 2009. "The Crux of the Matter: Ratings and Credit Risk Valuation at the heart of the Structured Finance Crisis," EconomiX Working Papers 2009-3, University of Paris West - Nanterre la Défense, EconomiX. [Downloadable!]
  12. Frank Milne, 2008. "Credit Crises, Risk Management Systems and Liquidity Modelling," Working Papers 1, John Deutsch Institute for the Study of Economic Policy. [Downloadable!]
  13. de la Torre, Augusto & Ize, Alain, 2009. "Regulatory reform : integrating paradigms," Policy Research Working Paper Series 4842, The World Bank. [Downloadable!]
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