IMF Working Papers

Leaning Against Windy Bank Lending

By Giovanni Melina, Stefania Villa

July 31, 2017

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Giovanni Melina, and Stefania Villa. Leaning Against Windy Bank Lending, (USA: International Monetary Fund, 2017) accessed October 6, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Using an estimated dynamic stochastic general equilibrium model with banking, this paper first provides evidence that monetary policy reacted to bank loan growth in the US during the Great Moderation. It then shows that the optimized simple interest-rate rule features no response to the growth of bank credit. However, the welfare loss associated to the empirical responsiveness is small. The sources of business cycle fluctuations are crucial in determining whether a “leaning-against-the-wind” policy is optimal or not. In fact, the predominant role of supply shocks in the model gives rise to a trade-off between inflation and financial stabilization.

Subject: Bank credit, Banking, Credit, Financial institutions, Inflation, Loans, Money, Output gap, Prices, Production

Keywords: Bank credit, Bayesian estimation, Credit, Credit growth, Credit-growth-augmented Taylor rule, Growth-Taylor rule, Inflation, Leaning against the wind, Lending relationship, Lending relationships, Loans, Monetary policy, Monetary policy rate, Monetary policy rule, Optimal monetary policy, Output gap, Rule parameter, WP

Publication Details

  • Pages:

    68

  • Volume:

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  • DOI:

    ---

  • Issue:

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  • Series:

    Working Paper No. 2017/179

  • Stock No:

    WPIEA2017179

  • ISBN:

    9781484312674

  • ISSN:

    1018-5941