Leaning Against Windy Bank Lending

69 Pages Posted: 5 Sep 2017

See all articles by Giovanni Melina

Giovanni Melina

International Monetary Fund (IMF)

Stefania Villa

University of Foggia; KU Leuven - Faculty of Business and Economics (FEB)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2017

Abstract

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.

Keywords: United States, Western Hemisphere, lending relationships, credit growth, leaning against the wind, Bayesian estimation, optimal monetary policy, Financial Markets and the Macroeconomy, Monetary Policy (Targets, Instruments, and Effects)

JEL Classification: E32, E44, E52

Suggested Citation

Melina, Giovanni and Villa, Stefania, Leaning Against Windy Bank Lending (July 2017). IMF Working Paper No. 17/179, Available at SSRN: https://ssrn.com/abstract=3030772

Giovanni Melina (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Stefania Villa

University of Foggia

Largo Papa Giovanni Paolo
Foggia, 71100
Italy

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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