New study suggests monetary policy should lean against financial winds
The article explores whether adjusting monetary policy based on asset prices and credit can help stabilize the economy during financial crises. The researchers used a model that considers how banks' lending practices and leverage affect the economy. They found that leaning against the wind policies, which involve adjusting monetary policy in response to financial imbalances, can be beneficial in stabilizing the economy during supply-side shocks. This approach is more effective than strict inflation targeting or standard monetary rules, especially in economies with high levels of private sector debt.