Cost-Benefit Analysis of Leaning Against the Wind: Are Costs Larger Also with Less Effective Macroprudential Policy?

77 Pages Posted: 28 Mar 2016

See all articles by Lars Svensson

Lars Svensson

International Monetary Fund (IMF)

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

Svensson, Lars, Cost-Benefit Analysis of Leaning Against the Wind: Are Costs Larger Also with Less Effective Macroprudential Policy? (January 2016). IMF Working Paper No. 16/3, Available at SSRN: https://ssrn.com/abstract=2754934

Lars Svensson (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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