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Licensed Unlicensed Requires Authentication Published by De Gruyter December 14, 2020

Leaning-Against-the-Wind: Which Policy and When?

Daeha Cho, Junghwan Mok and Myungkyu Shim


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.

JEL Classification: E32; E44; E58

Corresponding author: Myungkyu Shim, School of Economics, Yonsei University, Seodaemun-gu, South Korea, E-mail:

Funding source: Bank of Korea


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.

  1. First Draft: Sep, 2015. A previous version of this paper was circulated under the title “A New Perspective on “Leaning-Against-the-Wind” Debate,” “Frequency-Specific Effects of Macroprudential Policies,” and “Are effects of Macroprudential Policy Frequency-Specific?: A Design Limits Approach.” The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management.

Appendix A: Impulse responses to other shocks

Figure A.1: Impulse response functions.

Figure A.1:

Impulse response functions.


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Supplementary Material

The online version of this article offers supplementary material (

Received: 2019-07-11
Accepted: 2020-10-01
Published Online: 2020-12-14

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