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Leaning-Against-the-Wind: Which Policy and When?

Author

Listed:
  • Cho Daeha

    (Department of Economics, University of Melbourne, Carlton, Victoria, Australia)

  • Mok Junghwan

    (Monetary and Capital Markets Department, International Monetary Fund, Washington D.C, the United States)

  • Shim Myungkyu

    (School of Economics, Yonsei University, Seodaemun-gu, South Korea)

Abstract

This paper quantitatively examines which of the following three widely-used leaning-against-the-wind policies is effective in stabilizing aggregate fluctuations: i) a monetary policy that responds to the loan-to-GDP ratio, ii) a countercyclical LTV policy, and iii) a countercyclical capital requirement policy. In particular, we estimate a New Keynesian model with financial frictions using U.S. data and find that a monetary policy rule that responds positively to the loan-to-GDP ratio Amplifies the macroeconomic fluctuations while a countercyclical LTV policy has almost no effect. On the contrary, a countercyclical capital requirement policy is the most desirable in stabilizing GDP, inflation, and loans. However, the stabilization effect of the optimal countercyclical capital requirement policy is concentrated during periods in which financial shocks played a large role.

Suggested Citation

  • Cho Daeha & Mok Junghwan & Shim Myungkyu, 2021. "Leaning-Against-the-Wind: Which Policy and When?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 21(1), pages 125-150, January.
    • Handle: RePEc:bpj:bejmac:v:21:y:2021:i:1:p:125-150:n:2
    DOI: 10.1515/bejm-2019-0142
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    References listed on IDEAS

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    1. Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2013. "Is There a Trade-Off between Inflation and Output Stabilization?," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(2), pages 1-31, April.
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    More about this item

    Keywords

    leaning-against-the-wind; macroprudential policy; monetary policy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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