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Financial intermediaries and monetary economics

Author

Listed:
  • Tobias Adrian
  • Hyun Song Shin

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.

Suggested Citation

  • Tobias Adrian & Hyun Song Shin, 2009. "Financial intermediaries and monetary economics," Staff Reports 398, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:398
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    Keywords

    Interest rates; Capital market; Intermediation (Finance); Monetary policy; Risk; Business cycles;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General

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