"Leaning Against the Wind" and the Timing of Monetary Policy

 
Author/Editor: Agur, Itai ; Demertzis, Maria
 
Publication Date: April 03, 2013
 
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Summary: If monetary policy is to aim also at financial stability, how would it change? To analyze this question, this paper develops a general-form framework. Financial stability objectives are shown to make monetary policy more aggressive: in reaction to negative shocks, cuts are deeper but shorter-lived than otherwise. By keeping cuts brief, monetary policy tightens as soon as bank risk appetite heats up. Within this shorter time span, cuts must then be deeper than otherwise to also achieve standard objectives. Finally, we analyze how robust this result is to the presence of a bank regulatory tool, and provide a parameterized example.
 
Series: Working Paper No. 13/86
Subject(s): Monetary policy | Banking sector | Bank regulations | Financial stability | Economic models

 
English
Publication Date: April 03, 2013
ISBN/ISSN: 9781484378380/2227-8885 Format: Paper
Stock No: WPIEA2013086 Pages: 29
Price:
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