Leaning Against the Wind and the Timing of Monetary Policy

April 3, 2013

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Itai Agur, and Maria Demertzis. Leaning Against the Wind and the Timing of Monetary Policy, (USA: International Monetary Fund, 2013) accessed November 21, 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

If monetary policy is to aim also at financial stability, how would it change? To analyze this question, this paper develops a general-form framework. Financial stability objectives are shown to make monetary policy more aggressive: in reaction to negative shocks, cuts are deeper but shorter-lived than otherwise. By keeping cuts brief, monetary policy tightens as soon as bank risk appetite heats up. Within this shorter time span, cuts must then be deeper than otherwise to also achieve standard objectives. Finally, we analyze how robust this result is to the presence of a bank regulatory tool, and provide a parameterized example.

Subject: Bank credit, Bank regulation, Banking, Central bank policy rate, Financial regulation and supervision, Financial sector policy and analysis, Financial sector stability, Financial services, Financial statements, Output gap, Production, Public financial management (PFM)

Keywords: Asset risk incentive, Bank liability, Bank regulation, Bank risk, Bank shareholder, Central bank, Central bank policy rate, Financial sector stability, Financial stability, Financial statements, Interest rate, Interest rate variability, Monetary policy, Output gap, Regulation, Renewed appetite, Risk cap, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/086
Stock No:

WPIEA2013086
ISBN:

9781484378380
ISSN:

1018-5941

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