Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/60725
Authors: 
Adrian, Tobias
Estrella, Arturo
Shin, Hyun Song
Year of Publication: 
2010
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 421
Abstract: 
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.
Subjects: 
Monetary policy
financial intermediation
JEL: 
E52
E50
E44
G18
Document Type: 
Working Paper

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