Money, Liquidity, and Monetary Policy

Paper by Tobias Adrian and Hyun Song Shin (FRBNY)

In a market-based financial system, banking and capital market developments are inseparable, and funding conditions are closely tied to fluctuations in the leverage of market-based financial intermediaries. Offering a window on liquidity, the balance sheet growth of broker-dealers provides a sense of the availability of credit. Contractions of broker-dealer balance sheets have tended to precede declines in real economic growth, even before the current turmoil. For this reason, balance sheet quantities of market-based financial intermediaries are important macroeconomic state variables for the conduct of monetary policy.

In pictures:

For the “there is no credit crunch” crowd: “However, the drying up of credit in the capital markets would have been missed if one paid attention to bank-based lending only”