Leaning Against the Wind and the Timing of Monetary Policy

Author/Editor: Itai Agur ; Maria Demertzis
Publication Date: April 03, 2013
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
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

Publication Date: April 03, 2013
ISBN/ISSN: 9781484378380/1018-5941 Format: Paper
Stock No: WPIEA2013086 Pages: 29
US$18.00 (Academic Rate:
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