The changing nature of financial intermediation and its implications for monetary policy, April 2008

Monetary policy influences the economy through its effects on credit conditions facing households and firms, for example, the interest rates available on bank deposits and bank loans, and the cost of capital for firms, be it in the form of bank credit, debt issued on the capital market, or equity. While it is convenient for analytical purposes to assume that the monetary authority controls the relevant credit conditions directly through its control of a short-term policy interest rate, this simplification leaves no role for a banking system or for financial intermediation more generally. It thus precludes an analysis of how changes in the nature of financial intermediation may impact the conduct of monetary policy.