A case for leaning against the wind in a commodity-exporting economy

We report the empirical evidence of procyclicality (regarding the credit developments) of interest rate setting in a group of inflation targeting emerging market economies: monetary policy eases in response to a higher price of an exported commodity while real credit grows. Counterfactual exercises show that in some countries endogenous monetary policy responses to commodity shocks explain a substantial portion of the real credit growth. We also conduct a theoretical analysis and compare stabilisation properties (while accounting for financial stability risks) of the inflation-targeting policy rule and the” leaning against the wind” policy rules. For this purpose, we use the DSGE model with financial frictions and a banking sector calibrated to the Russian economy and measure the efficiency of policy results with different sensitivity to credit developments (“leaning against the wind” rules) under different variances of oil price shocks. The results show that when commodity price volatility is relatively high, leaning against the wind outperforms pure inflation targeting.