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Cost-benefit analysis of leaning against the wind

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  • Svensson, Lars E.O.

Abstract

An obvious cost of “leaning against the wind” is a weaker economy if no (financial) crisis occurs. Possible benefits are lower probabilities and smaller magnitudes of crises. A second cost—less obvious, previously overlooked, but higher—is a weaker economy if a crisis occurs. For representative estimates, costs exceed benefits by substantial margins. Overturning the result requires policy-rate effects on the probability and magnitude of crises more than 5–40 standard errors larger than representative estimates. Higher probabilities, larger magnitudes, or longer durations of crises—typical consequences of ineffective macroprudential policy—increase the margin of costs over benefits

Suggested Citation

  • Svensson, Lars E.O., 2017. "Cost-benefit analysis of leaning against the wind," Journal of Monetary Economics, Elsevier, vol. 90(C), pages 193-213.
  • Handle: RePEc:eee:moneco:v:90:y:2017:i:c:p:193-213
    DOI: 10.1016/j.jmoneco.2017.07.004
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    More about this item

    Keywords

    Monetary policy; Financial stability; Macroprudential policy; Financial crises;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises

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