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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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Bibliographic Info

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; Monetary policy; financial stability; bank risk; regulation;

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References

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Cited by:
  1. Aerdt Houben & Jan Kakes, 2013. "Financial imbalances and macroprudential policy in a currency union," DNB Occasional Studies 1105, Netherlands Central Bank, Research Department.
  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. 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.
  4. Agur, Itai & Demertzis, Maria, 2012. "Excessive bank risk taking and monetary policy," Working Paper Series 1457, European Central Bank.
  5. Nikolay Markov, 2010. "A Regime Switching Model for the European Central Bank," Research Papers by the Department of Economics, University of Geneva 10091, Département des Sciences Économiques, Université de Genève.
  6. Xi Chen & Michael Funke, 2013. "Renewed Momentum in the German Housing Market: Boom or Bubble?," CESifo Working Paper Series 4287, CESifo Group Munich.
  7. Agur, Itai, 2013. "Multiple bank regulators and risk taking," Journal of Financial Stability, Elsevier, vol. 9(3), pages 259-268.

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