The Tradeoffs in Leaning Against the Wind

Francois Gourio, Anil Kashyap and Jae Sim

No WP-2017-21, Working Paper Series from Federal Reserve Bank of Chicago

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.

Keywords: Credit risk; financial crisis; monetary policy (search for similar items in EconPapers)
JEL-codes: E52 E58 G28 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2017-08-01
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (10)

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Related works:
Journal Article: The Trade offs in Leaning Against the Wind (2018)
Working Paper: The Tradeoffs in Leaning Against the Wind (2017)
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