Discussion of ”Should monetary policy
lean against the wind? An analysis
based on a DSGE model with banking”
by Leonardo Gambacorta and Federico M. Signoretti
Paolo Gelain – Norges Bank
Understanding Macroprudential Regulation Workshop
Norges Bank – 29-30 November 2012
About the paper (1)
• Consensus before the crisis: central bank
should pay no attention to financial variables
over and above their effects on inflation
– Usual arguments (Mishkin 2011)
• inability of the central bank to correctly identify
bubbles
• lack of effectiveness of the policy rate to contain asset
price movements
• strong easing of policy would be sufficient to “clean up”
after the burst of a bubble
About the paper (2)
• Extra argument
– The theoretical underpinnings of the pre-crisis
consensus (e.g. Iacoviello 2005, Bernanke and
Gertler 2001) grounded on financial frictions only
on the borrowers’ side of credit markets
• If the supply side of credit markets is also
modeled central bank can have a substantial
gain in ”leaning against the wind”
Comment 1
• IJCB conference “New Frameworks for Monetary
Policy Analysis in an Era of Crises” Sept. 2012.
John Leahy
– Non-linearities
– Departure from rational expectations hypothesis (as a
tool to get boom-bust mechanism)
• Central
Bank
Macroeconomic
Modeling
Workshop – Warsaw Sept. 2012. Claudio Borio
– Our models are missing some key features (e.g.
endogenous financial cycle, non-fully rational agents)
Comment 2
One key element: asset price dynamics
Is the asset price dynamics in the model in line
with the empirical evidence?
1) What do we know about asset prices?
• They display excess volatility – Shiller (1981) and LeRoy
and Porter (1981)
2) What about this paper? Not clear!
Model is basically GNSS (2011) JMCB. Does the estimated
model capture the correct asset price dynamics? Unlikely
because
– Asset prices are not an observable
– There are not mechanisms to account for excess volatility
Is it relevant to account for excess volatility?
• Gelain, Lansing, and Mendicino (2012) House
Prices, Credit Growth, and Excess Volatility:
Implications for Monetary and Macroprudential
Policy
– Show that introducing moving-average expectations
helps to account house prices volatility
– LATW policy which are ineffective under rational
expectations might be destabilizing under movingaverage expectations
– LATW policy which are stabilizing under rational
expectations might be ineffective under movingaverage expectations
Is it relevant to account for excess volatility?
• Gali (2011) Monetary Policy and Rational
Asset Price Bubbles
– A systematic increase in interest rates in response
to a growing bubble is shown to enhance the
fluctuations in the latter
– The optimal monetary policy seeks to strike a
balance between stabilization of the bubble and
stabilization of aggregate demand and this might
lead monetary policy to decrease interest rate
more in boom phase
Comment 3 – Taylor principle
• Taylor principle seems to disappear from the
model
• Response coefficient to inflation goes from 0.01
to 5 and there is never indeterminacy
• We know that Taylor principle can be
– inverted, e.g. Bilbiie (2008) JET
– altered, e.g. Ascari and Ropele (2009) JMCB
• What is happening here?
– Surely related to the supply side!
Minor comments
1. Which are the parameters values?
2. Are they from GNSS (2011)? The structure of the
model changes here, so maybe GNSS values are
not appropriate
3. Why focusing only on technology and cost push
shock? Are they the most relevant in GNSS?
4. Why banking sector with pro-cyclical bank
leverage?
5. Wouldn’t be a welfare based measure better
than the CB loss? Most likely yes.
Conclusions
• Interesting paper on a relevant topic
• Try to check the asset price dynamics
– Best strategy introduce boom-bust mechanism
• Spend some words on the Taylor principle
• Fix minor issues
Thanks