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http://ssrn.com/abstract=1532309
 
 

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Monetary Cycles, Financial Cycles and the Business Cycle


Tobias Adrian


Federal Reserve Bank of New York

Arturo Estrella


Rensselaer Polytechnic Institute

Hyun Song Shin


Princeton University - Department of Economics

January 1, 2010

FRB of New York Staff Report No. 421

Abstract:     
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.

Number of Pages in PDF File: 19

Keywords: monetary policy, financial intermediation

JEL Classification: E52, E50, E44, G18

working papers series


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Date posted: January 6, 2010  

Suggested Citation

Adrian, Tobias and Estrella, Arturo and Shin, Hyun Song, Monetary Cycles, Financial Cycles and the Business Cycle (January 1, 2010). FRB of New York Staff Report No. 421. Available at SSRN: http://ssrn.com/abstract=1532309 or http://dx.doi.org/10.2139/ssrn.1532309

Contact Information

Tobias Adrian (Contact Author)
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
HOME PAGE: http://nyfedeconomists.org/adrian/
Arturo Estrella
Rensselaer Polytechnic Institute ( email )
110 8th Street
Troy, NY 12180
United States
Hyun Song Shin
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States

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