The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
“Leaning against the wind” (LAW) with a higher monetary policy interest rate may have benefits in
terms of lower real debt growth and associated lower probability of a financial crisis but has costs in
terms of higher unemployment and lower inflation, importantly including a higher cost of a crisis
when the economy is weaker. For existing empirical estimates, costs exceed benefits by a substantial
margin, even if monetary policy is nonneutral and permanently affects real debt. Somewhat
surprisingly, less effective macroprudential policy and generally a credit boom, with resulting higher
probability, severity, or duration of a crisis, increases costs of LAW more than benefits, thus further
strengthening the strong case against LAW.