Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/244265 
Authors: 
Year of Publication: 
2020
Series/Report no.: 
ESRB Working Paper Series No. 113
Publisher: 
European Systemic Risk Board (ESRB), European System of Financial Supervision, Frankfurt a. M.
Abstract: 
I estimate the comparative causal effects of monetary policy "leaning against the wind" (LAW) and macroprudential policy on bank-level lending and leverage by drawing on a single natural experiment. In 1920, when U.S. monetary policy was still decentralized, four Federal Reserve Banks implemented a conventional rate hike to address financial stability concerns. Another four Reserve Banks resorted to macroprudential policy with the same goal. Using sharp geographic regression discontinuities, I exploit the resulting policy borders with the remaining four Federal Reserve districts which did not change policy stance. Macroprudential policy caused both bank-level lending and leverage to fall significantly (by 11%-14%), whereas LAW had only weak and, in some areas, even perverse effects on these bank-level outcomes. I show that the macroprudential tool reined in over-extended banks more effectively than LAW because it allowed Federal Reserve Banks to use price discrimination when lending to highly leveraged counterparties. The perverse effects of the rate hike in some areas ensued because LAW lifted a pre-existing credit supply friction by incentivizing regulatory arbitrage. My results highlight the importance of context, design and financial infrastructure for the effectiveness of financial stability policies.
Subjects: 
monetary policy
macroprudential policy
leaning against the wind
progressive discount rate
creditboom
bank lending
leverage
financial crisis
Federal Reserve System
recession of 1920/1921
JEL: 
E44
E51
E52
E58
G21
N12
N22
Persistent Identifier of the first edition: 
ISBN: 
978-92-9472-176-1
Document Type: 
Working Paper

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