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Leaning Against the Wind: A Cost-Benefit Analysis for an Integrated Policy Framework

Luis Brandao Marques, R. Gaston Gelos, Machiko Narita and Erlend Nier

No 2020/123, IMF Working Papers from International Monetary Fund

Abstract: This paper takes a new approach to assess the costs and benefits of using different policy tools—macroprudential, monetary, foreign exchange interventions, and capital flow management—in response to changes in financial conditions. The approach evaluates net benefits of policies using quadratic loss functions, estimating policy effects on the full distribution of future output growth and inflation with quantile regressions. Tightening macroprudential policy dampens downside risks to growth stemming from loose financial conditions, and is beneficial in net terms. By contrast, tightening monetary policy entails net losses, calling for caution in the use of monetary policy to “lean against the wind.” These findings hold when policies are used in response to easing global financial conditions. Buying foreign-exchange or tightening capital controls has small net benefits.

Keywords: WP; financial conditions; loss function; Monetary Policy; Macroprudential Policy; FX Interventions; Capital Flow Management; Cost-Benefit Analysis; monetary policy shock; GDP growth; quantile regression; central bank; prudential policy; monetary policy tightening; Macroprudential policy instruments; Credit; Financial conditions index; Global; financial institution (search for similar items in EconPapers)
Pages: 59
Date: 2020-07-07
New Economics Papers: this item is included in nep-fdg, nep-mac and nep-mon
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Handle: RePEc:imf:imfwpa:2020/123