Leaning Against the Wind: A Cost-Benefit Analysis for an Integrated Policy Framework
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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. 2020/123
Subject:
Balance of payments Capital flow management Credit Financial conditions index Financial sector policy and analysis Macroprudential policy Macroprudential policy instruments Money
Frequency:
regular
English
Publication Date:
July 7, 2020
ISBN/ISSN:
9781513549651/1018-5941
Stock No:
WPIEA2020123
Pages:
59
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