The tradeoffs in leaning against the wind

Arbeitspapier

Credit booms sometimes lead to financial crises which are accompanied with severe and persistent economic slumps. Does this imply that monetary policy should "lean against the wind" and counteract excess credit growth, even at the cost of higher output and inflation volatility? We study this issue quantitatively in a standard small New Keynesian dynamic stochastic general equilibrium model which includes a risk of financial crisis that depends on "excess credit". We compare monetary policy rules that respond to the output gap with rules that respond to excess credit. We find that leaning against the wind may be attractive, depending on several factors, including (1) the severity of financial crises;(2) the sensitivity of crisis probability to excess credit; (3) the volatility of excess credit; (4) the level of risk aversion.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 2017-21

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy ; Central Banks and Their Policies ; Financial Institutions and Services: Government Policy and Regulation
• Subject: Geldpolitik ; Geldmengensteuerung ; Kreditmarkt ; Finanzkrise ; Stabilisierungspolitik ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gourio, François ; Kashyap, Anil K. ; Sim, Jae W.
• Event: Veröffentlichung
• (who): Federal Reserve Bank of Chicago
• (where): Chicago, IL
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/200561
• Last update: 10.03.2025, 11:43 AM CET