Leaning Against the Wind: Macroprudential Policy and the Financial Cycle

35 Pages Posted: 17 Jan 2019

Date Written: January 16, 2019


Should monetary policy lean against financial stability risks? This has been a subject of fierce debate over the last decades. We contribute to the debate about “leaning against the wind” (LAW) along three lines. First, we evaluate the cost and benefits of LAW using the Svensson (2017) framework for the euro area and find that the costs outweigh the benefits. Second, we extend the framework to address a critique that Svensson does not consider the lower frequency financial cycle. Third, we use this extended framework to assess the costs and benefits of monetary and macroprudential policy. We find that macroprudential policy has net marginal benefits in addressing risks to financial stability in the euro area, whereas monetary policy has net marginal costs. This would suggest that an active use of macroprudential policies targeting financial stability risks would alleviate the burden on monetary policy to “lean against the wind”.

Keywords: leaning against the wind, macroprudential policy, financial cycle

JEL Classification: E58, G01

Suggested Citation

Kok, Christoffer and Kockerols, Thore, Leaning Against the Wind: Macroprudential Policy and the Financial Cycle (January 16, 2019). ECB Working Paper No. 2223. Available at SSRN: https://ssrn.com/abstract=3317352

Christoffer Kok (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

Thore Kockerols

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107

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