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LEANING AGAINST WINDY BANK LENDING
Author(s) -
Melina Giovanni,
Villa Stefania
Publication year - 2018
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12491
Subject(s) - economics , monetary policy , business cycle , interest rate , loan , inflation (cosmology) , dynamic stochastic general equilibrium , great moderation , monetary economics , welfare , general equilibrium theory , macroeconomics , market economy , physics , theoretical physics
Using an estimated dynamic stochastic general equilibrium model with banking, this paper first provides evidence that monetary policy reacted to bank loan growth in the United States during the Great Moderation. It then shows that the optimized simple interest‐rate rule features no response to the growth of bank credit. However, the welfare loss associated to the empirical responsiveness is small. The sources of business cycle fluctuations are crucial in determining whether a “leaning‐against‐the‐wind” policy is optimal or not. In fact, the predominant role of supply shocks in the model gives rise to a trade‐off between inflation and financial stabilization. ( JEL E32, E44, E52)