Leaning Against Windy Bank Lending

IMF Working Papers, July 31, 2017

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Leaning Against Windy Bank Lending

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Bibliographic details

• Authors: Giovanni Melina, Stefania Villa
• Published: July 31, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484312674.001

Abstract / Main findings

• Using an estimated dynamic stochastic general equilibrium model with banking, the paper provides evidence that monetary policy reacted to bank loan growth in the US during the Great Moderation.
• The optimized simple interest-rate rule features no response to the growth of bank credit.
• 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.
• The predominant role of supply shocks in the model gives rise to a trade-off between inflation and financial stabilization.

Methodology

• Model: estimated dynamic stochastic general equilibrium (DSGE) model with banking.
• Empirical focus: US monetary policy behavior during the Great Moderation.
• Policy rule analyzed: simple interest-rate rule (including credit-growth-augmented specifications).

Policy implications and interpretation

• Historical monetary policy reacted to bank loan growth, but an optimized policy rule does not necessarily incorporate a response to credit growth.
• Because the welfare loss from the empirically observed responsiveness is small, the case for strict exclusion of credit-growth considerations in policy rules is nuanced.
• When supply shocks predominate, there is a trade-off between stabilizing inflation and stabilizing financial variables, affecting the desirability of “leaning against the wind” interventions.

Keywords and subjects

• Subjects: 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

Content in this bundle

• Leaning Against Windy Bank Lending, WP/17/179, July 2017
  • Leaning Against Windy Bank Lending, WP/17/179, July 2017 (Markdown version)
  • Leaning Against Windy Bank Lending, WP/17/179, July 2017 (PDF)