Leaning Against the Wind: An Empirical Cost-Benefit Analysis

This paper takes a new approach to assess the benefits of using different policy tools—macroprudential and monetary policies, foreign exchange interventions, and capital controls—in response to changes in financial conditions. Starting from quantile regressions, we evaluate policies across the full distribution of future output growth and inflation using loss functions. Tightening macroprudential policy dampens downside risks to growth from loose financial conditions, and is beneficial in net terms. By contrast, tightening monetary policy entails net losses. These findings also hold when reacting to easing global financial conditions, while buying foreign exchange or tightening capital controls yields only small net benefits.