Leaning Against the Wind and the Timing of Monetary Policy
IMF Working Papers, April 3, 2013
Source details
- Canonical URL
- Leaning Against the Wind and the Timing of Monetary Policy
Other formats
Bibliographic details
- Authors: Itai Agur, Maria Demertzis
- Published: April 3, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484378380.001
Summary findings
- Financial stability objectives make monetary policy more aggressive.
- In reaction to negative shocks, policy rate cuts are:
- deeper than otherwise, and
- 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 be deeper than otherwise to also achieve standard objectives.
Analytical approach
- The paper develops a general-form framework to analyze how adding financial stability objectives affects the timing and magnitude of monetary policy actions.
- The framework explicitly links monetary policy trade-offs to bank risk appetite and the timing of policy tightening.
Robustness and illustrative example
- The paper analyzes robustness of the main result to the presence of a bank regulatory tool.
- A parameterized example is provided to illustrate the mechanisms and quantitative implications.
Policy implications
- Central banks that incorporate financial stability explicitly will implement more aggressive (deeper) but shorter-lived interest rate cuts in response to negative shocks.
- Early tightening—triggered when bank risk appetite rises—serves to limit the build-up of financial instability.
- When cuts are intended to be brief, their depth must increase to attain standard macroeconomic objectives within the constrained time window.
Content in this bundle
- Appendix A: Proofs