Leaning Against the Wind and the Timing of Monetary Policy

Itai Agur and Maria Demertzis

No 2013/086, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; monetary policy; central bank; interest rate; financial stability; bank risk; regulation; bank liability; renewed appetite; risk cap; asset risk incentive; bank shareholder; interest rate variability; Financial sector stability; Output gap; Central bank policy rate; Bank regulation; Financial statements (search for similar items in EconPapers)
Pages: 29
Date: 2013-04-03
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Citations: View citations in EconPapers (14)

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