Leaning Against the Wind: A Cost-Benefit Analysis for an Integrated Policy Framework

Author/Editor:

Luis Brandao-Marques ; R. G Gelos ; Machiko Narita ; Erlend Nier

Publication Date:

July 7, 2020

Electronic Access:

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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:

This paper takes a new approach to assess the costs and benefits of using different policy tools—macroprudential, monetary, foreign exchange interventions, and capital flow management—in response to changes in financial conditions. The approach evaluates net benefits of policies using quadratic loss functions, estimating policy effects on the full distribution of future output growth and inflation with quantile regressions. Tightening macroprudential policy dampens downside risks to growth stemming from loose financial conditions, and is beneficial in net terms. By contrast, tightening monetary policy entails net losses, calling for caution in the use of monetary policy to “lean against the wind.” These findings hold when policies are used in response to easing global financial conditions. Buying foreign-exchange or tightening capital controls has small net benefits.

Series:

Working Paper No. 20/123

Subject:

Frequency:

regular

English

Publication Date:

July 7, 2020

ISBN/ISSN:

9781513549651/1018-5941

Stock No:

WPIEA2020123

Format:

Paper

Pages:

59

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