Liquidity, Monetary Policy, and Financial Cycles - FEDERAL RESERVE BANK of NEW YORK

Museum & Visits Regional Economy Data & Statistics Careers Blog Press Center

About the New York Fed
- About the New York Fed
- What We Do
- Who We Are
  - Bank Leadership
  - Diversity and Inclusion
- Communities We Serve
- Governance
- More About Us
- At the New York Fed, our mission is to make the U.S. economy stronger and the financial system more stable for all segments of society. We do this by executing monetary policy, providing financial services, supervising banks and conducting research and providing expertise on issues that impact the nation and communities we serve.
  
  The New York Innovation Center bridges the worlds of finance, technology, and innovation and generates insights into high-value central bank-related opportunities.
  
  Do you have a request for information and records? Learn how to submit it.
  
  Learn about the history of the New York Fed and central banking in the United States through articles, speeches, photos and video.
Markets & Policy Implementation

Economic Research
- Economic Research
- U.S. Economy
  - Consumer Expectations & Behavior
  - Growth & Inflation
  - Labor Market
  - Financial Stability
  - Banking
- REGIONAL ECONOMY
- RESEARCHERS
  - PUBLICATIONS
  - RESEARCH CENTERS
  - CALENDAR

Financial Institution Supervision
- Financial Institution Supervision
- Supervision & Regulation
  - Circulars
  - Regulations
- Reporting Forms & Instructions
  - Reporting Forms
  - Correspondence
- Bank Applications
- Consumer Protection
  - Community Reinvestment Act Exams
  - Frauds and Scams
- As part of our core mission, we supervise and regulate financial institutions in the Second District. Our primary objective is to maintain a safe and competitive U.S. and global banking system.
  
  The Governance & Culture Reform hub is designed to foster discussion about corporate governance and the reform of culture and behavior in the financial services industry.
  
  Need to file a report with the New York Fed? Here are all of the forms, instructions and other information related to regulatory and statistical reporting in one spot.
  
  The New York Fed works to protect consumers as well as provides information and resources on how to avoid and report specific scams.
Financial Services & Infrastructure
- Financial Services & Infrastructure
- Financial Services & Operations
- Financial Market Infrastructure & Reform
- The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
  
  The New York Innovation Center bridges the worlds of finance, technology, and innovation and generates insights into high-value central bank-related opportunities.
  
  The growing role of nonbank financial institutions, or NBFIs, in U.S. financial markets is a transformational trend with implications for monetary policy and financial stability.
  
  The New York Fed offers the Central Banking Seminar and several specialized courses for central bankers and financial supervisors.
Community Development
& Education

Press Release

Liquidity, Monetary Policy, and Financial Cycles

February 4, 2008

Note To Editors

The Federal Reserve Bank of New York today released Liquidity, Monetary Policy, and Financial Cycles, the latest article in its series Current Issues in Economics and Finance.

Authors Tobias Adrian and Hyun Song Shin examine how banks and other financial intermediaries adjust their leverage in response to a rise or fall in the value of their balance sheet assets. They find that these institutions increase their leverage during asset price booms and reduce it during downturns—a pattern of behavior that amplifies the fluctuations of the financial cycle.

The tool that the institutions use to adjust their leverage is collateralized borrowing or, more specifically, the repurchase agreement (repo). Adrian and Shin suggest that the growth rate of the stock of repos may be a very useful measure of liquidity in a market-based financial system.

Finally, the authors show a close correlation between the growth rate of repos and the degree of ease in monetary policy: “when monetary policy is loose, the stock of repos grows rapidly and market liquidity is high; when monetary policy is tight, repo growth is slow and market liquidity declines markedly.”

Tobias Adrian is a senior economist in the Capital Markets Function of the Research and Statistics Group. Hyun Song Shin is a professor of economics at Princeton University.

Liquidity, Monetary Policy, and Financial Cycles ››

Contact
Media Relations
NY.Fed.Media.Relations@NY.frb.org

By continuing to use our site, you agree to our Terms of Use and Privacy Statement. You can learn more about how we use cookies by reviewing our Privacy Statement.