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

IMF Working Papers, January 11, 2016

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“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.
LAW 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.
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, further strengthening the strong case against LAW.

Subject: Central bank policy rate, Financial crises, Macroprudential policy, Unemployment, Unemployment rate
Keywords: unemployment gap, WP

IMF Working Paper — Cost-Benefit Analysis of Leaning Against the Wind: Are Costs Larger Also with Less Effective Macroprudential Policy?

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