Leaning Against Windy Bank Lending

Giovanni Melina and Stefania Villa

No 1402, BCAM Working Papers from Birkbeck Centre for Applied Macroeconomics

Abstract: Using a dynamic stochastic general equilibrium model with banking, this paper first provides evidence that, during the Great Moderation, monetary policy leaned against the wind blowing from the loan market in the US. It then shows that the extent to which this occurred delivers a small welfare loss relative to the optimised simple interest-rate rule that features only a response to inflation. The source of business cycle fluctuations is crucial for the optimality of a leaning-against-the-wind policy. In fact, the pro-cyclical nature of lending creates a trade-off between inflation and financial stabilisation when supply shocks are prevalent.

Keywords: lending relationships; augmented Taylor rule; Bayesian estimation; optimal policy. (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 (search for similar items in EconPapers)
Date: 2014-07
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://eprints.bbk.ac.uk/26586/1/26586.pdf First version, 2014 (application/pdf)

Related works:
Journal Article: LEANING AGAINST WINDY BANK LENDING (2018)
Working Paper: Leaning Against Windy Bank Lending (2017)
Working Paper: Leaning Against Windy Bank Lending (2015)
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