This paper quantitatively examines which of the following three widely-used leaning-against-the-wind policies is effective in stabilizing aggregate fluctuations: i) a monetary policy that responds to the loan-to-GDP ratio, ii) a countercyclical LTV policy, and iii) a countercyclical capital requirement policy. In particular, we estimate a New Keynesian model with financial frictions using U.S. data and find that a monetary policy rule that responds positively to the loan-to-GDP ratio Amplifies the macroeconomic fluctuations while a countercyclical LTV policy has almost no effect. On the contrary, a countercyclical capital requirement policy is the most desirable in stabilizing GDP, inflation, and loans. However, the stabilization effect of the optimal countercyclical capital requirement policy is concentrated during periods in which financial shocks played a large role.
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We would like to thank an anonymous referee and the editor for their valuable comments. We are grateful to Soyoung Kim, Jinill Kim, and Yongseung Jung for their helpful comments and suggestions and would also like to thank seminar and conference participants at the Bank of Korea, Korea University, Kyunghee University, IFABS 2016 Barcelona, and third HenU/INFER Workshop on Applied Macroeconomics 2017. Myungkyu Shim gratefully acknowledges financial support from the Bank of Korea. Hye Rim Yi provided excellent research assistance.
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All Science Journal Classification (ASJC) codes
- Economics and Econometrics