Leaning Against Windy Bank Lending

• Author: Giovanni Melina - Stefania Villa
• Pages: 4-7

IMFIMF

Volume 18, Number 3 Fall 20 17

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B U L L E T I N

1

Leaning Against Windy Bank Lending

Giovanni Melina and Stefania Villa

In recent times credit booms and bu sts have

dramatically affected busines s cycle fluctuations.

This has calle d for a deeper understanding of

credit market conditions and the role of c entral

banks in ensuring f inancial stability. We examine

whether, during the Great Moderation, interest-

rate policy has reacted and whethe r it should have indeed reacted to bank lending

growth in the U.S. economy. A narrative analysis of the minutes of the Fed eral Open

Market Committee sugge sts a correlation between concerns on c redit conditions

and intended changes in the fede ral funds rate. This finding motivates a more

structural investigation. Using an e stimated macroeconomic model with banking,

this paper first provi des evidence that monetary policy did lean agai nst the wind

blowing from the loan market . It then shows that, although th e estimated monetary

policy feedback to bank credit grow th yields a small welfare loss, the optimal

interest-rate rule features almost no re sponse to credit conditions. Counterfactual

experiments unveil th at the sources of business cycle fluct uations are crucial in

determining whether a “ leaning-against-the-wind” policy i s optimal or not. In fact,

the predominant role of estimated supply shoc ks in the medium run gives rise to a

trade-off between inf lation and financial stabilization.

Central Bank Balance Sheet Policies:

Some Policy Implications

Manmohan Singh and Haobing Wang

In this research summary, we highlight two

policy implications from central bank balance

sheet policies: (a) assets held due to quantitative

easing are not the same as “rese rves” (or deposits

of the banking system at the central bank), and

(b) conventional interest-rate policy and balance

sheet adjustments con sist of two independent dimensions of monetar y policy and

they differ in their res pective financial spillovers to emerging market s.

Short-term policy rates in many adva nced economies (AEs) have remained

persistently low since the af termath of the recent financial cri sis. In an effort

to manage sluggish economic recoveries a nd reinvigorate growth, several

leading central ba nks (e.g., the Federal Reserve in the United States, t he Bank of

England, the Europe an Central Bank, and the Ba nk of Japan) have carried out

several rounds of quantitat ive easing (QE) to provide furt her monetary st imulus.

In This Issue

1 Central Bank Balance

Sheet Policies: Some

Policy Implications

1 Leaning Against Windy

Bank Lending

7 Q&A: Seven Questions

on the Globalization

of Farml and

10 IMF Working Papers

15 Staff Discussion Notes

15 IMF Economic Review

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Research Summaries

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