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Leaning Against the Wind and the Timing of Monetary Policy

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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 framework. Financial stability objectives are shown to make monetary policy more aggressive: in reaction to negative shocks, cuts are deeper but shorter-lived than otherwise. By keeping cuts brief, monetary policy tightens as soon as bank risk appetite heats up. Within this shorter time span, cuts must then be deeper than otherwise to also achieve standard objectives. Finally, we analyze how robust this result is to the presence of a bank regulatory tool, and provide a parameterized example.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/86.

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Length: 29
Date of creation: 03 Apr 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/86

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Keywords: Monetary policy; Banking sector; Bank regulations; Financial stability; Economic models; bank risk; monetary authority; central bank; bank risk taking; monetary fund; monetary economics; bank risk-taking; bank of canada; inflation; capital regulation; banks � balance sheets; monetary authorities; banking model; monetary transmission; bank objectives; discount rate; bank loans; aggregate demand; bank behavior; capital requirement; monetary policy decision; monetary policy strategy; bank default; bank risk exposure; deposit insurance; bank asset; bank shareholders; aggregate demand function; bank lending; bank liability; credit policy; bank loan officers; bank capital; prudential regulation; bank for international settlements; bank liabilities; bank liquidity;

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

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