The Tradeoffs in Leaning Against the Wind

Francois Gourio, Anil Kashyap and Jae Sim

No 23658, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Credit booms sometimes lead to financial crises which are accompanied with severe and persistent economic slumps. Does this imply that monetary policy should “lean against the wind” and counteract excess credit growth, even at the cost of higher output and inflation volatility? We study this issue quantitatively in a standard small New Keynesian dynamic stochastic general equilibrium model which includes a risk of financial crisis that depends on “excess credit”. We compare monetary policy rules that respond to the output gap with rules that respond to excess credit. We find that leaning against the wind may be attractive, depending on several factors, including (1) the severity of financial crises; (2) the sensitivity of crisis probability to excess credit; (3) the volatility of excess credit; (4) the level of risk aversion.

JEL-codes: E52 E58 G28 (search for similar items in EconPapers)
Date: 2017-08
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Note: CF EFG ME
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Citations: View citations in EconPapers (16)

Published as François Gourio & Anil K. Kashyap & Jae W. Sim, 2018. "The Trade offs in Leaning Against the Wind," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 66(1), pages 70-115, March.

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