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"Leaning Against the Wind" and the Timing of Monetary Pollicy

Working Papers
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Gepubliceerd: 21 juli 2011

Door: Itai Agur Maria Demertzis

If monetary policy is to aim also at financial stability, how would it change? To analyze this question, this paper develops a general-form, axiomatic framework. Financial stability objectives are shown to make a monetary authority more aggressive. By that we mean that in reaction to negative shocks, cuts are deeper but shorter-lived than otherwise. Keeping cuts brief is crucial as bank risk responds primarily to rates that are kept "too low for too long". Within this shorter time span, cuts must then be deeper than otherwise to also achieve standard objectives.

Keywords: Monetary policy, Financial stability.

JEL Classification: E52, G01, G21.

Working paper no. 303

303 - "Leaning Against the Wind" and the Timing of Monetary Pollicy

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