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

30 Pages Posted: 25 Apr 2013

Date Written: April 2013

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 framework. Financial stability objectives are shown to make monetary policy more aggressive: in reaction to negative shocks, cuts are deeper but shorter-lived than otherwise. By keeping cuts brief, monetary policy tightens as soon as bank risk appetite heats up. Within this shorter time span, cuts must then be deeper than otherwise to also achieve standard objectives. Finally, we analyze how robust this result is to the presence of a bank regulatory tool, and provide a parameterized example.

Keywords: Monetary policy, financial stability, bank risk, regulation

JEL Classification: E52, G01, G21

Suggested Citation

Agur, Itai and Demertzis, Maria, 'Leaning Against the Wind' and the Timing of Monetary Policy (April 2013). IMF Working Paper No. 13/86. Available at SSRN: https://ssrn.com/abstract=2256298

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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