Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/318131 
Year of Publication: 
2014
Series/Report no.: 
BCAM Working Paper No. 1402
Publisher: 
Birkbeck, University of London, Birkbeck Centre for Applied Macroeconomics (BCAM), London
Abstract: 
Using a dynamic stochastic general equilibrium model with banking, this paper first provides evidence that, during the Great Moderation, monetary policy leaned against the wind blowing from the loan market in the US. It then shows that the extent to which this occurred delivers a small welfare loss relative to the optimised simple interest-rate rule that features only a response to inflation. The source of business cycle fluctuations is crucial for the optimality of a leaning-against-the-wind policy. In fact, the pro-cyclical nature of lending creates a trade-off between inflation and financial stabilisation when supply shocks are prevalent.
Subjects: 
lending relationships
augmented Taylor rule
Bayesian estimation
optimal policy
JEL: 
E32
E44
E52
Document Type: 
Working Paper

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