This paper shows that the current interest rate-oriented monetary policy framework if
combined with sophisticated interbank transactions a la Adrian and Shin (2009), can foster
or accelerate financial procyclicality since the central bank’s high-powered money can be
used as a funding source for financial intermediaries. Interbank transactions that involve
maturity transformations pave a silky way for the flow of high-powered money to end up as
lending for the ultimate borrowers. This paper also provides some empirical evidence using
Korean financial data. In particular, we find that the growth of non-core liabilities, as a
close proxy for interbank liabilities, has substantial explanatory power for the growths of
core assets, monetary base, and broad money. This paper explores the implications of the
findings in terms of the central bank’s responsibility for asset price misalignments and
financial stability.