DP14797 Leaning against the wind and crisis risk

Author(s): Moritz Schularick, Lucas Ter Steege, Felix Ward
Publication Date: May 2020
Date Revised: June 2020
Keyword(s): Financial Stability, local projections, monetary policy
JEL(s): E44, E50, G01, G15, N10
Programme Areas: Financial Economics, Economic History, International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14797

Can central banks defuse rising stability risks in financial booms by leaning against the wind with higher interest rates? This paper studies the state-dependent effects of monetary policy on financial crisis risk. Based on the near-universe of advanced economy financial cycles since the 19th century, we show that discretionary leaning against the wind policies during credit and asset price booms are more likely to trigger crises than prevent them.