Leaning Against the Wind and Crisis Risk

55 Pages Posted: 28 May 2020 Last revised: 2 Nov 2020

See all articles by Moritz Schularick

Moritz Schularick

University of Bonn - Department of Economics; Centre for Economic Policy Research (CEPR)

Lucas Ter Steege

affiliation not provided to SSRN

Felix Ward

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2020

Abstract

Can central banks defuse rising stability risks in financial booms by leaning against the wind with higher interest rates? This paper studies the state-dependent effects of monetary policy on financial crisis risk. Based on the near-universe of advanced economy financial cycles since the 19th century, we show that discretionary leaning against the wind policies during credit and asset price booms are more likely to trigger crises than prevent them.

Keywords: Financial Stability, local projections, monetary policy

JEL Classification: E44, E50, G01, G15, N10

Suggested Citation

Schularick, Moritz and Ter Steege, Lucas and Ward, Felix, Leaning Against the Wind and Crisis Risk (May 2020). CEPR Discussion Paper No. DP14797, Available at SSRN: https://ssrn.com/abstract=3612866

Moritz Schularick (Contact Author)

University of Bonn - Department of Economics ( email )

Bonn
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Lucas Ter Steege

affiliation not provided to SSRN

No Address Available

Felix Ward

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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