Leaning Against the Wind: A Cost-Benefit Analysis for an Integrated Policy Framework

By Luis Brandão-Marques, Gaston Gelos, Machiko Narita, Erlend Nier

July 7, 2020

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Luis Brandão-Marques, Gaston Gelos, Machiko Narita, and Erlend Nier. Leaning Against the Wind: A Cost-Benefit Analysis for an Integrated Policy Framework, (USA: International Monetary Fund, 2020) accessed December 3, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper takes a new approach to assess the costs and benefits of using different policy tools—macroprudential, monetary, foreign exchange interventions, and capital flow management—in response to changes in financial conditions. The approach evaluates net benefits of policies using quadratic loss functions, estimating policy effects on the full distribution of future output growth and inflation with quantile regressions. Tightening macroprudential policy dampens downside risks to growth stemming from loose financial conditions, and is beneficial in net terms. By contrast, tightening monetary policy entails net losses, calling for caution in the use of monetary policy to “lean against the wind.” These findings hold when policies are used in response to easing global financial conditions. Buying foreign-exchange or tightening capital controls has small net benefits.

Subject: Balance of payments, Capital flow management, Credit, Financial conditions index, Financial sector policy and analysis, Macroprudential policy, Macroprudential policy instruments, Money

Keywords: Capital Flow Management, Central bank, Cost-Benefit Analysis, Credit, Financial conditions, Financial conditions index, Financial institution, FX Interventions, GDP growth, Global, Loss function, Macroprudential Policy, Macroprudential policy instruments, Monetary Policy, Monetary policy shock, Monetary policy tightening, Prudential policy, Quantile regression, WP

Publication Details

Pages:

59
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/123
Stock No:

WPIEA2020123
ISBN:

9781513549651
ISSN:

1018-5941

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