## 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](https://www.imf.org/en/publications/wp/issues/2016/12/31/leaning-against-the-wind-and-the-timing-of-monetary-policy-40459)

## Other formats

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## Bibliographic details
- Authors: Itai Agur, Maria Demertzis
- Published: April 3, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484378380.001

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### 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.

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## Content in this bundle

- **Appendix A: Proofs**
  - [Appendix A: Proofs (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp1386.pdf.md){rel="alternate" type="text/markdown"}
  - [Appendix A: Proofs (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp1386.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/leaning-against-the-wind-and-the-timing-of-monetary-policy-40459_