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

January 11, 2016

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Format: Chicago

Lars E. O. Svensson Cost-Benefit Analysis of Leaning Against the Wind: Are Costs Larger Also with Less Effective Macroprudential Policy?, (USA: International Monetary Fund, 2016) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

“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.

Subject: Central bank policy rate, Financial crises, Macroprudential policy, Unemployment, Unemployment rate

Keywords: Unemployment gap, WP

Publication Details

Pages:

76
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/003
Stock No:

WPIEA2016003
ISBN:

9781498314787
ISSN:

1018-5941

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