Cost-Benefit Analysis of Leaning Against the Wind: Are Costs Larger Also with Less Effective Macroprudential Policy?
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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.
Series:
Working Paper No. 2016/003
Subject:
Central bank policy rate Financial crises Macroprudential policy Unemployment Unemployment rate
English
Publication Date:
January 11, 2016
ISBN/ISSN:
9781498314787/1018-5941
Stock No:
WPIEA2016003
Pages:
76
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