Staff Reports

Financial Intermediaries and Monetary Economics

October 2009Number 398
Revised May 2010
JEL classification: E00, E02, G28

Authors: Tobias Adrian and Hyun Song Shin

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. 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.

Available only in PDFPDF75 pages / 492 kb

For a published version of this report, see Tobias Adrian and Hyun Song Shin, "Financial Intermediaries and Monetary Economics," in Benjamin M. Friedman and Michael Woodford, eds., Handbook of Monetary Economics 3: 601-50. Elsevier B. V. (2010)