Leaning Against Windy Bank Lending

Leaning Against Windy Bank Lending

Written by: Mr.Giovanni Melina

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  • Publisher: International Monetary Fund
  • Publish Date: 2017-08-07
  • ISBN-10: 9781484314470
  • ebook-leaning-against-windy-bank-lending.pdf
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Book Summary

Using an estimated dynamic stochastic general equilibrium model with banking, this paper first provides evidence that monetary policy reacted to bank loan growth in the US during the Great Moderation. It then shows that the optimized simple interest-rate rule features no response to the growth of bank credit. However, the welfare loss associated to the empirical responsiveness is small. The sources of business cycle fluctuations are crucial in determining whether a “leaning-against-the-wind” policy is optimal or not. In fact, the predominant role of supply shocks in the model gives rise to a trade-off between inflation and financial stabilization.

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