Authors: Nina Boyarchenko, Richard K. Crump, Keshav Dogra, Leonardo Elias, and Ignacio Lopez Gaffney
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Staff Reports
The Nonlinear Case Against Leaning Against the Wind
Number 1100
May 2024
May 2024
JEL classification: E44, E52, E58
We re-examine the relationship between monetary policy and financial stability in a setting that allows for nonlinear, time-varying relationships between monetary policy, financial stability, and macroeconomic outcomes. Using novel machine-learning techniques, we estimate a flexible “nonlinear VAR” for the stance of monetary policy, real activity, inflation, and financial conditions, and evaluate counterfactual evolutions of downside risk to real activity under alternative monetary policy paths. We find that a tighter path of monetary policy in 2003-05 would have increased the risk of adverse real outcomes three to four years ahead, especially if the tightening had been large or rapid. This suggests that there is limited evidence to support “leaning against the wind” even once one allows for rich nonlinearities, intertemporal dependence, and crisis predictability.
Author Disclosure Statement(s)
Nina Boyarchenko
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Richard K. Crump
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Nonlinear Case Against Leaning Against the Wind,” joint with Nina Boyarchenko, Keshav Dogra, Leonardo Elias and Ignacio Lopez Gaffney. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Keshav Dogra
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Leonardo Elias
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Ignacio Lopez Gaffney
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Nonlinear Case Against Leaning Against the Wind,” joint with Nina Boyarchenko, Richard Crump, Keshav Dogra, and Leonardo Elias. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Richard K. Crump
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Nonlinear Case Against Leaning Against the Wind,” joint with Nina Boyarchenko, Keshav Dogra, Leonardo Elias and Ignacio Lopez Gaffney. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Keshav Dogra
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Leonardo Elias
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Ignacio Lopez Gaffney
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Nonlinear Case Against Leaning Against the Wind,” joint with Nina Boyarchenko, Richard Crump, Keshav Dogra, and Leonardo Elias. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Suggested Citation:
Boyarchenko, Nina, Richard K. Crump, Keshav Dogra, Leonardo Elias, and Ignacio Lopez Gaffney. 2024. “The Nonlinear Case Against Leaning Against the Wind.” Federal Reserve Bank of New York Staff Reports, no. 1100, May. https://doi.org/10.59576/sr.1100
Boyarchenko, Nina, Richard K. Crump, Keshav Dogra, Leonardo Elias, and Ignacio Lopez Gaffney. 2024. “The Nonlinear Case Against Leaning Against the Wind.” Federal Reserve Bank of New York Staff Reports, no. 1100, May. https://doi.org/10.59576/sr.1100
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