Cost-benefit analysis of leaning against the wind

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