December 2021 issue contents
"Leaning against the Wind," Macroprudential Policy, and the Financial Cycle

Thore Kockerolsa and Christoffer Kokb


Should monetary policy lean against financial stability risks? This has been a subject of fierce debate over the last decades. We contribute to the debate about "leaning against the wind" (LAW) along two lines. First, we extend the Svensson (2017) framework to address a critique that the framework does not consider the lower-frequency financial cycle. We then evaluate the costs and benefits of LAW in the extended framework for the euro area and find that the costs outweigh the benefits. Second, we assess the costs and benefits of monetary and macroprudential policy. We find that macroprudential policy has net marginal benefits in addressing risks to financial stability in the euro area, whereas monetary policy has net marginal costs. This would suggest that an active use of macroprudential policies targeting financial stability risks would alleviate the burden on monetary policy to "lean against the wind."

JEL Code: E58, G01.

  Full article (PDF, 40 pages)

Norges Bank
European Central Bank