Cost-benefit analysis of leaning against the wind

Lars Svensson

Journal of Monetary Economics, 2017, vol. 90, issue C, 193-213

Abstract: An obvious cost of “leaning against the wind” is a weaker economy if no (financial) crisis occurs. Possible benefits are lower probabilities and smaller magnitudes of crises. A second cost—less obvious, previously overlooked, but higher—is a weaker economy if a crisis occurs. For representative estimates, costs exceed benefits by substantial margins. Overturning the result requires policy-rate effects on the probability and magnitude of crises more than 5–40 standard errors larger than representative estimates. Higher probabilities, larger magnitudes, or longer durations of crises—typical consequences of ineffective macroprudential policy—increase the margin of costs over benefits

Keywords: Monetary policy; Financial stability; Macroprudential policy; Financial crises (search for similar items in EconPapers)
JEL-codes: E52 E58 G01 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (136)

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Working Paper: Cost-Benefit Analysis of Leaning Against the Wind (2017)
Working Paper: Cost-Benefit Analysis of Leaning Against the Wind (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:90:y:2017:i:c:p:193-213

DOI: 10.1016/j.jmoneco.2017.07.004

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