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Financial Intermediaries and Monetary Economics

In: Handbook of Monetary Economics

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  • Adrian, Tobias
  • Song Shin, Hyun

Abstract

We reconsider the role of financial intermediaries in monetary economics, and explore the hypothesis that the financial intermediary sector is the engine that drives the financial cycle through fluctuations in the price of risk. In this framework, balance sheet quantities emerge as a key indicator of risk appetite and, hence, for the "risk-taking channel" of monetary policy. We document evidence that balance sheets of financial intermediaries provide a window on the transmission of monetary policy through capital market conditions. Short-term interest rates are found 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 suggest the importance of tracking balance sheet quantities.

Suggested Citation

  • Adrian, Tobias & Song Shin, Hyun, 2010. "Financial Intermediaries and Monetary Economics," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 12, pages 601-650 Elsevier.
  • Handle: RePEc:eee:monchp:3-12
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    Keywords

    Monetary Economics; Financial Intermediation; Risk Taking Channel; Bank Lending Channel;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General

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