Liquidity, Monetary Policy, and Financial Cycles

7 Pages Posted: 11 Feb 2008

See all articles by Tobias Adrian

Tobias Adrian

International Monetary Fund

Hyun Song Shin

Bank for International Settlements (BIS)

Date Written: January 1, 2008


A close look at how financial intermediaries manage their balance sheets suggests that these institutions raise their leverage during asset price booms and lower it during downturns - pro-cyclical actions that tend to exaggerate the fluctuations of the financial cycle. The authors of this study argue that the growth rate of aggregate balance sheets may be the most fitting measure of liquidity in a market-based financial system. Moreover, the authors show a strong correlation between balance sheet growth and the easing and tightening of monetary policy.

Keywords: monetary policy, financial intermediation, financial cycles

JEL Classification: E50, G00, G21

Suggested Citation

Adrian, Tobias and Shin, Hyun Song, Liquidity, Monetary Policy, and Financial Cycles (January 1, 2008). Current Issues in Economics and Finance, Vol. 14, No. 1, January/February 2008, Available at SSRN:

Tobias Adrian (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States


Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002


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