Leaning Against Windy Bank Lending

Giovanni Melina and Stefania Villa

No 2017/179, IMF Working Papers from International Monetary Fund

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

Keywords: WP; monetary policy; lending relationships; credit growth; leaning against the wind; Bayesian estimation; optimal monetary policy; monetary policy rule; lending relationship; credit-growth-augmented Taylor rule; rule parameter; growth-Taylor rule; monetary policy rate; Credit; Inflation; Bank credit; Output gap; Loans (search for similar items in EconPapers)
Pages: 68
Date: 2017-07-31
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: LEANING AGAINST WINDY BANK LENDING (2018)
Working Paper: Leaning Against Windy Bank Lending (2015)
Working Paper: Leaning Against Windy Bank Lending (2014)
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