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Cost-Benefit Analysis of Leaning Against the Wind; Are Costs Larger Also with Less Effective Macroprudential Policy?

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  • Lars E. O. Svensson

Abstract

“Leaning against the wind” (LAW) with a higher monetary policy interest rate may have benefits in terms of lower real debt growth and associated lower probability of a financial crisis but has costs in terms of higher unemployment and lower inflation, importantly including a higher cost of a crisis when the economy is weaker. For existing empirical estimates, costs exceed benefits by a substantial margin, even if monetary policy is nonneutral and permanently affects real debt. Somewhat surprisingly, less effective macroprudential policy and generally a credit boom, with resulting higher probability, severity, or duration of a crisis, increases costs of LAW more than benefits, thus further strengthening the strong case against LAW.

Suggested Citation

  • Lars E. O. Svensson, 2016. "Cost-Benefit Analysis of Leaning Against the Wind; Are Costs Larger Also with Less Effective Macroprudential Policy?," IMF Working Papers 16/3, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:16/3
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    References listed on IDEAS

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    1. Andrea Ajello & Thomas Laubach & J. David Lopez-Salido & Taisuke Nakata, 2016. "Financial Stability and Optimal Interest-Rate Policy," Finance and Economics Discussion Series 2016-067, Board of Governors of the Federal Reserve System (US).
    2. Williams, John C., 2015. "Macroprudential policy in a microprudential world," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    3. Paolo Gelain & Kevin J. Lansing & Gisle J. Natvik, 2015. "Leaning Against the Credit Cycle," Working Paper 2015/04, Norges Bank.
    4. Lars E.O. Svensson, 2014. "Inflation Targeting and "Leaning against the Wind"," International Journal of Central Banking, International Journal of Central Banking, vol. 10(2), pages 103-114, June.
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    Citations

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    Cited by:

    1. Boris Hofmann & Gert Peersman, 2017. "Monetary Policy Transmission and Trade-offs in the United States: Old and New," CESifo Working Paper Series 6745, CESifo Group Munich.
    2. Ilomaki Jukka & Laurila Hannu, 2017. "Stock Market Dynamics and the Central Bank in a General Equilibrium Model," Working Papers 1715, University of Tampere, School of Management, Economics.
    3. repec:eee:dyncon:v:91:y:2018:i:c:p:289-317 is not listed on IDEAS
    4. repec:rba:rbaacv:acv2017-02 is not listed on IDEAS
    5. Salle, Isabelle & Seppecher, Pascal, 2018. "Stabilizing an unstable complex economy on the limitations of simple rules," Journal of Economic Dynamics and Control, Elsevier, vol. 91(C), pages 289-317.
    6. Yakov Ben-Haim & Maria Demertzis & Jan Willem Van den End, 2017. "Fundamental uncertainty and unconventional monetary policy: an info-gap approach," DNB Working Papers 544, Netherlands Central Bank, Research Department.
    7. Christophe Blot & Paul Hubert & Fabien Labondance, 2018. "Monetray policy and asset price bubbles," Sciences Po publications 37, Sciences Po.
    8. Robert J. Hill & Miriam Steurer & Sofie R. Waltl, 2017. "Owner Occupied Housing in the CPI and Its Impact On Monetary Policy During Housing Booms and Busts," Graz Economics Papers 2017-12, University of Graz, Department of Economics.
    9. Paul S. Calem & Ricardo Correa & Seung Jung Lee, 2016. "Prudential Policies and Their Impact on Credit in the United States," International Finance Discussion Papers 1186, Board of Governors of the Federal Reserve System (U.S.).
    10. Marcin Bielecki & Michał Brzoza-Brzezina & Marcin Kolasa & Krzysztof Makarski, 2017. "Could the boom-bust in the eurozone periphery have been prevented?," GRAPE Working Papers 17, GRAPE Group for Research in Applied Economics.
    11. repec:eee:jmacro:v:54:y:2017:i:pb:p:187-207 is not listed on IDEAS
    12. Van der Ghote, Alejandro, 2018. "Coordinating monetary and financial regulatory policies," Working Paper Series 2155, European Central Bank.
    13. Verona, Fabio & Martins, Manuel M.F. & Drumond, Inês, 2017. "Financial shocks, financial stability, and optimal Taylor rules," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 187-207.
    14. Kim, Soyoung & Mehrotra, Aaron, 2017. "Effects of monetary and macro-prudential policies – evidence from inflation targeting economies in the Asia-Pacific region and potential implications for China," BOFIT Discussion Papers 4/2017, Bank of Finland, Institute for Economies in Transition.
    15. Pietrunti, Mario, 2017. "Financial frictions and the real economy," ESRB Working Paper Series 41, European Systemic Risk Board.
    16. Bruno Albuquerque, 2017. "One Size Fits All? Monetary Policy And Asymmetric Household Debt Cycles In Us States," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 17/937, Ghent University, Faculty of Economics and Business Administration.
    17. Philip Turner, 2017. "Did Central Banks Cause The Last Financial Crisis? Will They Cause The Next?," National Institute of Economic and Social Research (NIESR) Discussion Papers 484, National Institute of Economic and Social Research.
    18. repec:eee:moneco:v:90:y:2017:i:c:p:193-213 is not listed on IDEAS
    19. Christophe Blot & Paul Hubert & Fabien Labondance, 2018. "Monetary Policy and Asset Price Bubbles," EconomiX Working Papers 2018-5, University of Paris Nanterre, EconomiX.
    20. Paul, Pascal, 2017. "The Time-Varying Effect of Monetary Policy on Asset Prices," Working Paper Series 2017-9, Federal Reserve Bank of San Francisco, revised 02 Jan 2018.

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