Cost-Benefit Analysis of Leaning Against the Wind: Are Costs Larger Also with Less Effective Macroprudential Policy?
77 Pages Posted: 28 Mar 2016
Date Written: January 2016
Abstract
'Leaning against the wind' (LAW) with a higher monetary policy interest rate may have benefits in terms of lower real debt growth and associated lower probability of a financial crisis but has costs in terms of higher unemployment and lower inflation, importantly including a higher cost of a crisis when the economy is weaker. For existing empirical estimates, costs exceed benefits by a substantial margin, even if monetary policy is nonneutral and permanently affects real debt. Somewhat surprisingly, less effective macroprudential policy and generally a credit boom, with resulting higher probability, severity, or duration of a crisis, increases costs of LAW more than benefits, thus further strengthening the strong case against LAW.
Keywords: macroprudential policy, unemployment, unemployment rate, debt, marginal cost, benchmark, Monetary Policy (Targets, Instruments, and Effects), All Countries, macroprudential policy.,
JEL Classification: E52, E58, G21
Suggested Citation: Suggested Citation