## Leaning Against the Wind: A Cost-Benefit Analysis for an Integrated Policy Framework

_IMF Working Papers, July 7, 2020_

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## Bibliographic details
- Authors: Luis Brandao Marques, Gaston Gelos, Machiko Narita, Erlend Nier
- Published: July 7, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513549651.001

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### Summary
- This paper assesses costs and benefits of using macroprudential, monetary, foreign exchange interventions, and capital flow management tools in response to changes in financial conditions.
- Net benefits are evaluated using quadratic loss functions.
- Policy effects on the full distribution of future output growth and inflation are estimated with quantile regressions.
- Main comparative results:
  - Tightening macroprudential policy dampens downside risks to growth stemming from loose financial conditions and is beneficial in net terms.
  - Tightening monetary policy entails net losses, suggesting caution in using monetary policy to “lean against the wind.”
  - These findings hold when policies respond to easing global financial conditions.
  - Buying foreign exchange or tightening capital controls has small net benefits.

### Methodology
- Uses quadratic loss functions to compute net benefits of policies.
- Employs quantile regressions to estimate policy effects on the full distribution of future output growth and inflation.
- Considers multiple policy instruments: macroprudential policy instruments, monetary policy (including monetary policy shock and monetary policy tightening), FX interventions, and capital flow management.

### Key Findings
- Macroprudential policy:
  - Tightening macroprudential measures reduces downside growth risks associated with loose financial conditions.
  - Overall net benefits from tightening macroprudential policy are positive.
- Monetary policy:
  - Tightening monetary policy produces net losses under the framework used.
  - The results call for caution when using monetary policy to counteract financial-condition-driven risks ("leaning against the wind").
- Foreign exchange interventions and capital flow management:
  - Buying foreign exchange has small net benefits.
  - Tightening capital controls has small net benefits.
- Robustness:
  - The comparative results remain when policies are used in response to easing global financial conditions.

### Policy Implications
- Prioritize macroprudential tightening over monetary tightening when aiming to reduce downside growth risks from loose financial conditions.
- Exercise caution in deploying monetary policy for financial-stability purposes given estimated net losses.
- Recognize that FX interventions and capital flow management offer limited net benefits in the contexts analyzed.

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- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2020/07/07/leaning-against-the-wind-a-cost-benefit-analysis-for-an-integrated-policy-framework-49554_