Monetary cycles, financial cycles, and the business cycle

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Staff Report ; No. 421

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy ; Monetary Policy, Central Banking, and the Supply of Money and Credit: General ; Financial Markets and the Macroeconomy ; General Financial Markets: Government Policy and Regulation
• Subject: Monetary policy ; financial intermediation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Adrian, Tobias ; Estrella, Arturo ; Shin, Hyun Song
• Event: Veröffentlichung
• (who): Federal Reserve Bank of New York
• (where): New York, NY
• (when): 2010

Further information

• Handle: http://hdl.handle.net/10419/60725
• Last update: 10.03.2025, 11:42 AM CET