RDP 2019-05: Cost-benefit Analysis of Leaning against the Wind 7. Conclusion

Evaluations of leaning against the wind are subject to substantial disagreement and uncertainty. Empirical evidence on some key assumptions is missing or thin. This is a subject of active research and conclusions may change. Two issues strike us as particularly troubling. First, some evidence points to banking crises as having highly persistent, if not permanent, effects on the level of productivity. Second, it is possible that interest rates affect the probability of a crisis through their effect on house prices, in addition to their effect through credit. Both these issues are priorities for further study. Nevertheless, the current state of the international research suggests that costs substantially outweigh benefits. Estimates for Australia lead to a similar conclusion.

However, that conclusion does not necessarily mean that the policy of leaning against the wind is inappropriate. Just because benefits of the policy cannot be identified or quantified does not mean they are small. Leaning against the wind might have benefits that are not apparent to researchers. In particular, the Reserve Bank has emphasised that low interest rates increase households' indebtedness and that this may have deleterious macroeconomic effects. Research on these issues is a priority.