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"Leaning Against the Wind" and the Timing of Monetary Pollicy

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  • Itai Agur
  • Maria Demertzis

Abstract

If monetary policy is to aim also at financial stability, how would it change? To analyze this question, this paper develops a general-form, axiomatic framework. Financial stability objectives are shown to make a monetary authority more aggressive. By that we mean that in reaction to negative shocks, cuts are deeper but shorter-lived than otherwise. Keeping cuts brief is crucial as bank risk responds primarily to rates that are kept "too low for too long". Within this shorter time span, cuts must then be deeper than otherwise to also achieve standard objectives.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 303.

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Date of creation: Jul 2011
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Handle: RePEc:dnb:dnbwpp:303

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Keywords: Monetary policy; Financial stability;

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Cited by:
  1. Nikolay Markov, 2010. "A Regime Switching Model for the European Central Bank," Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva 10091, Institut d'Economie et Econométrie, Université de Genève.
  2. Manthos D. Delis & Yiannis Karavias, . "Optimal versus realized bank credit risk and monetary policy," Discussion Papers 13/03, University of Nottingham, Granger Centre for Time Series Econometrics.
  3. Agur, Itai & Demertzis, Maria, 2012. "Excessive bank risk taking and monetary policy," Working Paper Series 1457, European Central Bank.
  4. Aerdt Houben & Jan Kakes, 2013. "Financial imbalances and macroprudential policy in a currency union," DNB Occasional Studies 1105, Netherlands Central Bank, Research Department.
  5. Xi Chen & Michael Funke, 2013. "Renewed Momentum in the German Housing Market: Boom or Bubble?," CESifo Working Paper Series 4287, CESifo Group Munich.
  6. Agur, Itai, 2013. "Multiple bank regulators and risk taking," Journal of Financial Stability, Elsevier, vol. 9(3), pages 259-268.
  7. Diana Bonfim & Nuno Monteiro, 2013. "The implementation of the countercyclical capital buffer: rules versus discretion," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.

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