Financial intermediaries drive business cycles through risk-taking, impacting monetary policy.
Financial intermediaries play a crucial role in the economy by affecting the business cycle through their impact on risk prices. The balance sheets of these intermediaries show how they respond to changes in monetary policy, especially through capital market conditions. Short-term interest rates have a significant influence on the size of financial intermediary balance sheets. This suggests that monitoring balance sheet quantities is important for guiding monetary policy, beyond just focusing on the money stock.