'Leaning Against the Wind' and the Timing of Monetary Policy

18 Pages Posted: 31 Oct 2011

Date Written: July 1, 2011

Abstract

If monetary policy is to aim also at financial stability, how would it change? To analyze this question, this paper develops a general-form, axiomatic framework. Financial stability objectives are shown to make a monetary authority more aggressive. By that we mean that in reaction to negative shocks, cuts are deeper but shorter-lived than otherwise. Keeping cuts brief is crucial as bank risk responds primarily to rates that are kept "too low for too long". Within this shorter time span, cuts must then be deeper than otherwise to also achieve standard objectives.

Keywords: Monetary policy, Financial stability

JEL Classification: E52, G01, G21

Suggested Citation

Agur, Itai and Demertzis, Maria, 'Leaning Against the Wind' and the Timing of Monetary Policy (July 1, 2011). De Nederlandsche Bank Working Paper No. 303. Available at SSRN: https://ssrn.com/abstract=1951893 or http://dx.doi.org/10.2139/ssrn.1951893

Itai Agur (Contact Author)

IMF ( email )

700 19th Street NW
Washington, DC 20431
United States

HOME PAGE: http://itaiagur.weebly.com/

Maria Demertzis

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

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