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Cost-benefit Analysis of Leaning against the Wind

Author

Listed:
  • Trent Saunders

    (Reserve Bank of Australia)

  • Peter Tulip

    (Reserve Bank of Australia)

Abstract

Setting interest rates higher than macroeconomic conditions would warrant due to concerns about financial stability is called 'leaning against the wind'. Many recent papers have attempted to quantify and evaluate the effects of this policy. This paper summarises this research and applies the approach to Australia. The papers we survey see the benefit of leaning against the wind as avoiding financial crises, such as those that affected Australia in 1990 or other countries in 2008. Most of the international research finds that interest rates have too small an effect on the probability of a crisis for this benefit to be worth higher unemployment. Using Australian data, we find similar results. We estimate the costs of leaning against the wind to be three to eight times larger than the benefit of avoiding financial crises. However, research has not yet quantified the increased resilience of household balance sheets, which may be an extra benefit of leaning against the wind.

Suggested Citation

  • Trent Saunders & Peter Tulip, 2019. "Cost-benefit Analysis of Leaning against the Wind," RBA Research Discussion Papers rdp2019-05, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp2019-05
    as

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    References listed on IDEAS

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    Cited by:

    1. Anthony Brassil, 2022. "The Consequences of Low Interest Rates for the Australian Banking Sector," RBA Annual Conference Papers acp2022-04, Reserve Bank of Australia, revised Dec 2022.

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    More about this item

    Keywords

    financial stability; monetary policy; evidence-based policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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