Cost-benefit Analysis of Leaning against the Wind
Trent Saunders and
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Trent Saunders: Reserve Bank of Australia
RBA Research Discussion Papers from Reserve Bank of Australia
Setting interest rates higher than macroeconomic conditions would warrant due to concerns about financial stability is called 'leaning against the wind'. Many recent papers have attempted to quantify and evaluate the effects of this policy. This paper summarises this research and applies the approach to Australia. The papers we survey see the benefit of leaning against the wind as avoiding financial crises, such as those that affected Australia in 1990 or other countries in 2008. Most of the international research finds that interest rates have too small an effect on the probability of a crisis for this benefit to be worth higher unemployment. Using Australian data, we find similar results. We estimate the costs of leaning against the wind to be three to eight times larger than the benefit of avoiding financial crises. However, research has not yet quantified the increased resilience of household balance sheets, which may be an extra benefit of leaning against the wind.
Keywords: financial stability; monetary policy; evidence-based policy (search for similar items in EconPapers)
JEL-codes: E52 E58 G18 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:rba:rbardp:rdp2019-05
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