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Leaning against the Wind and Crisis Risk

Author

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  • Moritz Schularick
  • Lucas ter Steege
  • Felix Ward

Abstract

Can central banks defuse rising stability risks in financial booms by leaning against the wind with higher interest rates? This paper studies the state-dependent effects of monetary policy on financial stability. Based on the near-universe of advanced economy financial cycles since the 19th century, we show that discretionary leaning against the wind policies during credit and asset price booms are more likely to trigger crises than prevent them.

Suggested Citation

  • Moritz Schularick & Lucas ter Steege & Felix Ward, 2020. "Leaning against the Wind and Crisis Risk," CESifo Working Paper Series 8484, CESifo.
    • Handle: RePEc:ces:ceswps:_8484
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    Cited by:

    1. Maximilian Grimm & Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2023. "Loose Monetary Policy and Financial Instability," Working Paper Series 2023-06, Federal Reserve Bank of San Francisco.
    2. Frederic Boissay & Fabrice Collard & Jordi Galí & Cristina Manea, 2021. "Monetary Policy and Endogenous Financial Crises," Working Papers 1308, Barcelona School of Economics.
    3. Koeniger, Winfried & Lennartz, Benedikt & Ramelet, Marc-Antoine, 2022. "On the transmission of monetary policy to the housing market," European Economic Review, Elsevier, vol. 145(C).
    4. Nina Boyarchenko & Giovanni Favara & Moritz Schularick, 2022. "Financial Stability Considerations for Monetary Policy: Empirical Evidence and Challenges," Staff Reports 1003, Federal Reserve Bank of New York.
    5. Gabriel Jiménez & Dmitry Kuvshinov & José-Luis Peydró & Björn Richter, 2022. "Monetary Policy, Inflation, and Crises: New Evidence from History and Administrative Data," Working Papers 1378, Barcelona School of Economics.
    6. Chavleishvili, Sulkhan & Kremer, Manfred & Lund-Thomsen, Frederik, 2023. "Quantifying financial stability trade-offs for monetary policy: a quantile VAR approach," Working Paper Series 2833, European Central Bank.
    7. Andreas Fagereng & Magnus A. H. Gulbrandsen & Martin B. Holm & Gisle J. Natvik, 2021. "How does monetary policy affect household indebtedness?," Working Paper 2021/5, Norges Bank.
    8. Gabriel, Ricardo Duque, 2023. "Monetary policy and the wage inflation-unemployment tradeoff," European Economic Review, Elsevier, vol. 159(C).
    9. Benati, Luca, 2023. "Exploring the trade-off between leaning against credit and stabilizing economic activity," Economics Letters, Elsevier, vol. 223(C).
    10. Cezar, Rafael & Monnet, Eric, 2023. "Capital controls and foreign reserves against external shocks: Combined or alone?," Journal of International Money and Finance, Elsevier, vol. 137(C).
    11. Thore Kockerols & Erling Motzfeldt Kravik & Yasin Mimir, 2021. "Leaning against persistent financial cycles with occasional crises," Working Paper 2021/11, Norges Bank.
    12. Fernandez-Gallardo, Alvaro, 2023. "Preventing financial disasters: Macroprudential policy and financial crises," European Economic Review, Elsevier, vol. 151(C).
    13. Gebauer, Stefan & Mazelis, Falk, 2023. "Macroprudential regulation and leakage to the shadow banking sector," European Economic Review, Elsevier, vol. 154(C).
    14. Elgin, Ceyhun & Yalaman, Abdullah & Yasar, Sezer & Basbug, Gokce, 2021. "Economic policy responses to the COVID-19 pandemic: The role of central bank independence," Economics Letters, Elsevier, vol. 204(C).
    15. Koeniger, Winfried & Lennartz, Benedikt & Ramelet, Marc-Antoine, 2022. "On the transmission of monetary policy to the housing market," European Economic Review, Elsevier, vol. 145(C).
    16. Maximilian Grimm, 2024. "The Effect of Monetary Policy on Systemic Bank Funding Stability," ECONtribute Discussion Papers Series 341, University of Bonn and University of Cologne, Germany.
    17. Dominika Ehrenbergerova & Josef Bajzik & Tomas Havranek, 2023. "When Does Monetary Policy Sway House Prices? A Meta-Analysis," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(2), pages 538-573, June.
    18. Bochmann, Paul & Dieckelmann, Daniel & Fahr, Stephan & Ruzicka, Josef, 2023. "Financial stability considerations in the conduct of monetary policy," Working Paper Series 2870, European Central Bank.
    19. Rottner, Matthias, 2023. "Financial crises and shadow banks: A quantitative analysis," Journal of Monetary Economics, Elsevier, vol. 139(C), pages 74-92.
    20. repec:tin:wpaper:220063 is not listed on IDEAS
    21. Frederic Boissay & Claudio Borio & Cristina Leonte & Ilhyock Shim, 2023. "Prudential policy and financial dominance: exploring the link," BIS Quarterly Review, Bank for International Settlements, March.
    22. Nicolas Caramp & Dejanir H. Silva, 2021. "Monetary Policy and Wealth Effects: The Role of Risk and Heterogeneity," Working Papers 341, University of California, Davis, Department of Economics.
    23. Górajski, Mariusz & Kuchta, Zbigniew, 2023. "Coordination and non-coordination risks of monetary and macroprudential authorities: A robust welfare analysis," The North American Journal of Economics and Finance, Elsevier, vol. 67(C).

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    More about this item

    Keywords

    financial crises; instrumental variable; open economy trilemma; local projections;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative

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