Monthly Archives: January 2016

Goodfriend and King misreport the monetary policy stance of the minority

In their review of Riksbank monetary policy, Goodfriend and King make a big point of the minority (Karolina Ekholm and me) having voted for policy rates only 0.25 percentage point below the majority and use that to argue that the rate hikes 2010-2011 were “broadly accepted by all members of Executive Board.”  But they fail to report that the monetary policy stance, appropriately measured, that the minority voted for was substantially more expansionary than the majority’s (not to speak of that it was only a first step of several needed in a move toward a better monetary policy). They thus fail to report the position of the minority correctly. For instance, in September 2011, the minority voted for a policy stance equivalent to a repo rate 1.5 percentage point lower the next 4 quarters than the majority’s stance.  Continue reading

Cost-Benefit Analysis of Leaning Against the Wind

Cost-Benefit Analysis of Leaning Against the Wind,” Journal of Monetary Economics 90 (2017) 193-213. CEPR Discussion Paper DP11739, NBER Working Paper No. 21902. A previous version, with the longer title “Cost-Benefit Analysis of Leaning Against the Wind: Are Costs Larger Also with Less Effective Macroprudential Policy?”, was published as IMF Working Paper WP/16/3, January 2016.

Link to published version (Science Direct)

Data and Matlab program

Vox Column


A simple and transparent framework for cost-benefit analysis of “leaning against the wind” (LAW), that is, tighter monetary policy for financial-stability purposes, is presented. LAW has an obvious cost in the form of a weaker economy if no crisis occurs and possible benefits in the form of a lower probability and smaller magnitude of (financial) crises. A second cost—less obvious, overlooked by previous literature, but higher—is a weaker economy if a crisis occurs. For representative empirical benchmark estimates and reasonable assumptions the result is that the costs of LAW exceed the benefits by a substantial margin. The result is robust to alternative assumptions and estimates. A higher probability, larger magnitude, or longer duration of crises—typical consequences of ineffective macroprudential policy—all increase the margin of costs over benefits. To overturn the result, policy-interest-rate effects on the probability and magnitude of crises need to be more than 5–40 standard errors larger than the benchmark estimates.