VOX  CEPR Policy Portal

The monetary policy of ‘leaning against the wind’ involves a higher policy interest rate. It is usually justified as reducing the probability and severity of a future crisis. This column argues that the costs of the policy exceed the benefits by a substantial margin, especially when taking into account that the cost of a crisis is higher if the economy is initially weaker due to the leaning itself. Furthermore, contrary to the common argument that the policy may be justified when macroprudential policy is less effective or even non-existent, less effective macroprudential policy actually makes the case against leaning against the wind policy stronger, not weaker.