The article explores how banks and monetary policy affect the economy. Banks change their liabilities in response to monetary policy, which limits the impact on their assets. Financial shocks played a big role in the 2007-2008 recession. Inflation targeting is effective in improving welfare, and financial shocks explain a significant portion of output variation. Market segmentation between short and long bond markets is needed to match real-world data on term premiums. Smoothing the term premium can be beneficial for the economy.