IMF Economic Review

, Volume 66, Issue 1, pp 70–115 | Cite as

The Trade offs in Leaning Against the Wind

Research Article


Credit booms sometimes lead to financial crises and subsequent severe and persistent economic slumps. So should monetary policy “lean against the wind” and counteract excess credit growth, or should it focus only on inflation and output stability? We study this issue quantitatively in a small New Keynesian dynamic stochastic general equilibrium model in which the risk of financial crises depends on “excess credit.” We compare monetary policy rules responding to the output gap to rules that respond to excess credit. We find that responding to credit can lead to a lower average probability of financial crisis, at the cost of higher cyclical volatility in inflation and output. We discuss the factors that affect the desirability of leaning against the wind.

Supplementary material

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Electronic supplementary material 1 (XLS 96 kb)


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Copyright information

© International Monetary Fund 2018

Authors and Affiliations

  • François Gourio
    • 1
  • Anil K. Kashyap
    • 2
    • 3
  • Jae W. Sim
    • 4
  1. 1.The Federal Reserve Bank of ChicagoChicagoUSA
  2. 2.Booth School of BusinessUniversity of ChicagoChicagoUSA
  3. 3.Bank of EnglandLondonUK
  4. 4.The Board of Governors of the Federal Reserve SystemWashingtonUSA

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