## Leaning Against Windy Bank Lending

_IMF Working Papers, July 31, 2017_

## Source details

**Canonical URL:** [Leaning Against Windy Bank Lending](https://www.imf.org/en/publications/wp/issues/2017/07/31/leaning-against-windy-bank-lending-45141)

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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

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### 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

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## Content in this bundle

- **Leaning Against Windy Bank Lending, WP/17/179, July 2017**
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_Source: https://www.imf.org/en/publications/wp/issues/2017/07/31/leaning-against-windy-bank-lending-45141_